The Antitrust Revolution: Economics, Competition, and Policy

By John E. Kwoka Jr.; Lawrence J. White | Go to book overview

The Economic
and Legal Context

Markets may be structured in a wide variety of ways, but purely structural concerns in antitrust arise in the cases of monopolies and oligopolies. Since the monopoly model is at the heart of almost all antitrust analysis, we will begin with a discussion of monopoly and then move on to oligopoly.


MONOPOLY

Economics

The microeconomic theory of monopoly is straightforward: A single seller of a good or service, for which (at a price that would just yield normal profits) there are no good substitutes and for which entry is difficult, will be able to take advantage of its market power. If the seller can sell only at a single price to all buyers (i.e., it cannot practice price discrimination), then its pursuit of maximum profits will lead it to sell a smaller output and maintain a higher price than would an otherwise similar competitive industry.1

Figure I-1 portrays this outcome. As the figure indicates, the maximizing price will not be at “the sky's the limit” levels but instead will be related to the demand curve (via the derived marginal revenue) for the monopolist's output and the monopolist's marginal costs.2 An immediately important point is that the demand curve—which expresses the empirical reality that at higher prices customers generally buy less—does limit the extent to which the monopolist's price can exceed competitive levels.

This monopoly outcome is socially less efficient than the competitive outcome, because of allocative inefficiency: The monopolist produces too

1A similar argument applies to monopsony: a single buyer in a market, who can gain by buying less
and at a lower price than if competition among buyers prevailed.

2The familiar formula for profit maximization is PM = MC/(1 + 1/ED), where ED is the (negative)
elasticity of demand. Once PM has been determined, the monopolist's output (QM) can be derived
from the demand relationship.

-8-

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