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    in most cases, markets are considered more efficent and better off when monopolies are broken up. why is it hard for governments to do this?

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    Busting Up Monopolies

    14.1 Market Power and Monopoly

    Learning Objectives

    What is a monopoly?

    What is the outcome when there is a monopoly?

    What are the policies taken to deal with monopolists?

    When there are many buyers and sellers of a homogeneous product, we have a competitive marketA market that satisfies two conditions: (1) there are many buyers and sellers, and (2) the goods the sellers produce are perfect substitutes. (Figure 14.1 "The Competitive Market Outcome"). Equilibrium is at the intersection of supply and demand. At the equilibrium level of output, households enjoy buyer surplusA measure of how much the buyer gains from a transaction, equal to the buyer’s valuation minus the price., given by the marked area below the demand curve and above the equilibrium price. The surplus arises from the fact that some buyers are willing to pay more than the equilibrium price for the good.

    Figure 14.1 The Competitive Market Outcome

    At the equilibrium quantity in a competitive market, all gains from trade are exhausted.

    Surplus also flows to firms. Remember that a competitive firm’s individual supply curveHow much output a firm in a perfectly competitive market will supply at any given price. It is the same as a firm’s marginal cost curve. is equal to its marginal cost curve. In Figure 14.1 "The Competitive Market Outcome", the supply curve slopes upward because marginal cost is increasing. Firms obtain surplus because they can produce output at a marginal cost that is less than the equilibrium price of the good. This is shown as seller surplus in the figure.

    At the equilibrium quantity, there are no further gains from trade. Producing more output would not increase the total surplus. In fact, producing more output would reduce the surplus: the marginal cost of producing more output would exceed the marginal valuation of extra output. Producing less output would likewise lower total surplus because the buyers and the sellers would lose some of their surplus.

    The competitive market provides a benchmark because it leads to an efficient outcome. But very few markets are truly competitive. In most markets, firms possess some market power. This means, in particular, that they are able to set a price above marginal cost without losing all of their sales. In a competitive market, the demand curve facing a firm is perfectly elastic at the market price, whereas when a firm has market power, its demand curve slopes downward.

    Toolkit: Section 17.10 "Buyer Surplus and Seller Surplus"

    You can review the concepts of buyer surplus, seller surplus, and the gains from trade, in the toolkit.

    The Definition of a Market

    At the other extreme to the competitive market is the case of monopolyA single supplier of a good or service in a market.. A monopoly arises when there is a single producer in a market. The demand curve facing a firm is, in this case, the same as the market demand curveThe number of units of a good or a service demanded at each price..

    The definition of a monopoly seems easy, yet it is hard to decide exactly what we mean by “a market.” Think about diamonds. It is often said that the De Beers Corporation is a monopolist in the market for diamonds because this company controls most of the world’s diamond supply. Yet, depending on how broadly or narrowly we define the market, De Beers has either a lot of competitors or only a few. We could define the market very narrowly as “De Beers-branded diamonds” (De Beers is able to brand its diamonds by using certificates of authenticity). De Beers would then be a monopolist by definition. We could define the market more broadly as “all diamonds,” in which case De Beers has substantial market power but does not have a total monopoly. This is perhaps the most natural definition to use, yet it misses the fact that other precious stones, such as emeralds, rubies, or opals, are also possible substitutes for diamonds. An even broader market definition is “the market for precious stones.” We could go even further still and consider De Beers as part of the market for luxury goods, competing with, say, Louis Vuitton bags and Ferrari sports cars. We illustrate this in Figure 14.2 "The Extent of Competition Depends on the Definition of the Market".

    Figure 14.2 The Extent of Competition Depends on the Definition of the Market

    There is no hard-and-fast definition of a market, but goods that are highly substitutable for each other are generally taken to be in the same market.

    Figure 14.2 "The Extent of Competition Depends on the Definition of the Market" also gives an illustration for the case of music. By definition, a given indie band has monopoly power over its own music. So again, with a very narrow definition of the market, we would say that the band is a monopolist for its own songs. But that band also competes with other indie bands for consumers’ dollars, so another definition of the market would be “CDs by all indie bands.” Again, we could define the market still more broadly as “all music” or even “all forms of entertainment.”

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    Question: In Most Cases, Markets Are Considered More Efficent And Better Off When Monopolies Are Broken Up. Why Is It Hard For Governments To Do This? Correct Answer(S) Drag Appropriate Answer(S) Here + If A Monopoly Splits Up, A New One Will Form From The Resulting Competitive Firms. Sometimes Keeping A Monopoly Intact Is The Best Option When It Lowers Production

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    Transcribed image text: In most cases, markets are considered more efficent and better off when monopolies are broken up. Why is it hard for governments to do this? Correct Answer(s) Drag appropriate answer(s) here + If a monopoly splits up, a new one will form from the resulting competitive firms. Sometimes keeping a monopoly intact is the best option when it lowers production costs. + Monopolists have a lot of money to fend off antitrust lawsuits. You que Monopolies produce more social welfare than competitive markets, so breaking them up would have large consequences. Qu Competitive firms cause just as many problems for consumers. Monopolies often have laws to protect them. Drag appropriate answer(s) here

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