Chapter 13: Monopoly and Antitrust
1. Since there are substitutes, but not necessarily good ones, for any product, monopoly is a matter of
degree. This is why antitrust (anti-monopoly) suits often turn on the definition of the appropriate market.
2. Locks are a good way of illustrating barriers to entry. You use locks as a barrier against others getting
what is yours, but what if you could loc
for sale in competition with you)? Property rights are a form of such societal locks to keep others from
3. A good way to check on student understanding of the monopoly model is to ask in class why the
existence of a price taking monopolist would violate the law of demand. Either a correct student answer
or a response to an incorrect answer can be used to make clear that since an industry (market) demand
curve must slope down, and a monopolist is the only seller of a product, it must face the downward
sloping industry demand curve as its demand curve.
4. Connecting back explicitly to the elasticity of demand-total revenue rule discussed earlier in the text is
very helpful here to make the meaning of marginal revenue being positive or negative clear (especially
since the diagrams in the text are truncated for the case where marginal revenue is negative):
5. Make sure students recognize that the case of a perfectly competitive firm is an extension of the
monopoly model to the case of a horizontal demand curve; the exact same approach is used, except that
marginal revenue equals price in the competitive model because of the horizontal demand curve, but is
less than price for the monopoly model.
6. A good test of student understanding of the monopoly model is to ask about the following extensions:
a) Why would a firm with a higher marginal cost curve choose a profit maximizing point on a more elastic
range of its demand curve, other things equal (demand would be more elastic where a higher marginal
revenue equals marginal cost);
7. As an illustration that monopolies need not be profitable, a buggy whip monopoly during the period
8. Regarding the question of whether monopoly retards innovation, it is worth emphasizing the point that
9. Reiterate to students that the welfare cost of monopoly represents the same analysis as that for
collusion, taxes, costly regulations, price floors and price ceilings, trade restrictions, etc.—wiping out
10. Make sure you draw the connection between the price greater than marginal cost result of the single
11. A good classroom illustration of some of the administrative problems with average cost pricing would
c
irrelevant (sunk) ones given such an incentive shows how hard it would be to successfully implement
such an approach.
12. A good example of the difficulty with cost-based government price regulation is AT&T. When it was a
regulated monopolist of interstate long distance telephone calls, it would throw in all sorts of false (not
13. Note to students that average cost pricing for natural monopolies may be more efficient if the welfare
cost of raising the tax revenue (elsewhere) that would be necessary to subsidize the losses from marginal
cost pricing is included. When subsidies are required, you must weigh the marginal gain from reducing
the inefficiency in one market against the marginal cost of increasing inefficiency elsewhere via increasing
taxes.
14. With respect to the natural monopoly discussion in the text, remind students that, as Harold Demsetz
15. Show students just how common price discrimination is, by expanding on the examples in the text,
16. A further price discrimination example is why the price differential between hardback and paperback
18. Show how peak load pricing is particularly important for efficiency in cases where there is a sharply
rising marginal cost curve (near capacity), with the one-time California retail price controls on electricity an
example of what can happen from failing to use appropriate peak load pricing.