Law of Diminishing Utility

added satisfaction declines as a consumer acquires additional units of a given product


want-satisfying power. The utility of a good or service is the satisfaction or pleasure one gets from consuming it.

Total utility

the total amount of satisfaction or pleasure a person derives from consuming some specific quantity—for example, 10 units—of a good or service

Marginal utility

the extra satisfaction a consumer realizes from an additional unit of that product—for example, from the eleventh unit.

Utility-Maximizing Rule

To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility

Consumer Equilibrium

When the consumer has "balanced his margins" using the Utility-Maximizing rule, he has achieved consumer equilibrium and has no incentive to alter his expenditure pattern. In fact, any person who has achieved consumer equilibrium would be worse off—total utility would decline—if there were any alteration in the bundle of goods purchased, providing there is no change in taste, income, products, or prices.

income effect

the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good.

substitution effect

the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded.

behavioral economics

the branch of economics that combines insights from economics, psychology, and neuroscience to better understand those situations in which actual choice behavior deviates from the predictions made by earlier theories, which incorrectly concluded that people were always rational, deliberate, and unswayed by emotions

Three Behavioral Economics Facts About People

1. People judge good things and bad things in relative terms, as gains and losses relative to their current situation, or status quo.
2. People experience both diminishing marginal utility for gains (as you have already seen) as well as diminishing marginal disutility for losses (meaning that each successive unit of loss hurts, but less painfully than the previous unit).
3. People are loss averse, meaning that for losses and gains near the status quo, losses are felt much more intensely than gains—in fact, about 2.5 times more intensely. Thus, for instance, the pain experienced by an investor who loses one dollar from his current status quo level of wealth will be about 2.5 times more intense than the pleasure he would have felt if he had gained one dollar relative to his current level of wealth.

framing effects

Changes in people's preferences that are caused by new information that alters the frame used to define whether situations are gains or losses

endowment effect

the tendency that people have to put a higher valuation on anything that they currently possess (are endowed with) than on identical items that they do not own but might purchase

utility-maximization model

assumes that the typical consumer is rational and acts on the basis of well-defined preferences. Because income is limited and goods have prices, the consumer cannot purchase all the goods and services he or she might want. The consumer therefore selects the attainable combination of goods that maximizes his or her utility or satisfaction.

economic cost

the payment that must be made to obtain and retain the services of a resource. It is the income the firm must provide to resource suppliers to attract resources away from alternative uses.

explicit costs

the monetary payments it makes to those from whom it must purchase resources that it does not own. Because these costs involve an obvious cash transaction, they are referred to as explicit costs. Be sure to remember that explicit costs are opportunity costs because every monetary payment used to purchase outside resources necessarily involves forgoing the best alternatives that could have been purchased with the money.

implicit costs

the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash. Because these costs are present but not obvious, they are referred to as implicit costs.

A firm's economic costs are the sum......

......of its explicit costs and its implicit costs:

Economic costs = explicit costs + implicit costs

accounting profit

the profit number that accountants calculate by subtracting total explicit costs from total sales revenue.

normal profit

the typical (or "normal") amount of accounting profit that you would most likely have earned in one of these other ventures.

economic profit

the result of subtracting all of your economic costs—both explicit costs and implicit costs—from revenue: Economic Profit = Revenue − Explicit Costs − Implicit Costs.

short run

a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used.

long run

a period long enough for it to adjust the quantities of all the resources that it employs, including plant capacity

Total product (TP)

the total quantity, or total output, of a particular good or service produced

Marginal product (MP)

the extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process. Thus, Marginal Product= change in total product/change in labor input

Average product (AP),

also called labor productivity, is output per unit of labor input: Average Product= total product/units of labor

law of diminishing returns

This law assumes that technology is fixed and thus the techniques of production do not change. It states that as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline

Fixed costs

those costs that do not vary with changes in output. Fixed costs are associated with the very existence of a firm's plant and therefore must be paid even if its output is zero.

Variable Costs

costs that change with the level of output.

Total cost

the sum of fixed cost and variable cost at each level of output:


Average fixed cost (AFC)

found by dividing total fixed cost (TFC) by that amount of output (Q).

Average variable cost (AVC)

is calculated by dividing total variable cost (TVC) by that amount of output (Q):


Average total cost (ATC)

found by dividing total cost (TC) by that output (Q) or by adding AFC and AVC at that output

Marginal cost (MC)

the extra, or additional, cost of producing one more unit of output. MC can be determined for each added unit of output by noting the change in total cost that unit's production entails

marginal decisions

decisions to produce a few more or a few less units

diseconomies of scale

the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer

constant returns to scale

In some industries a rather wide range of output may exist between the output at which economies of scale end and the output at which diseconomies of scale begin. That is, there may be a range of constant returns to scale over which long-run average cost does not change

minimum efficient scale (MES)

the lowest level of output at which a firm can minimize long-run average costs

natural monopoly

a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service.

Pure competition

involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily

Pure monopoly

a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue.

Monopolistic competition

characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Present in this model is widespread nonprice competition, a selling strategy in which a firm does not try to distinguish its product on the basis of price but instead on attributes like design and workmanship (an approach called product differentiation). Either entry to or exit from monopolistically competitive industries is quite easy


involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output

imperfect competition

All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly

Very large numbers

A basic feature of a purely competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets. Examples: markets for farm commodities, the stock market, and the foreign exchange market.

Standardized product

Purely competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because purely competitive firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition

"Price takers"

In a purely competitive market, individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker: It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking a price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, it has no reason to charge a lower price, say, $1.95. Doing that would shrink its profit

Free entry and exit

New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market

average revenue

revenue per unit

Marginal revenue

the change in total revenue (or the extra revenue) that results from selling one more unit of output.

break-even point

an output at which a firm makes a normal profit but not an economic profit

Identical costs

All firms in the industry have identical cost curves. This assumption lets us discuss an "average," or "representative," firm, knowing that all other firms in the industry are similarly affected by any long-run adjustments that occur.

Constant-cost industry

The industry is a constant-cost industry. This means that the entry and exit of firms does not affect resource prices or, consequently, the locations of the average-total-cost curves of individual firms.

constant-cost industry

This means that industry expansion or contraction will not affect resource prices and therefore production costs. Graphically, it means that the entry or exit of firms does not shift the long-run ATC curves of individual firms.

increasing-cost industries

ATC curves shift upward as the industry expands and downward as the industry contracts. Usually, the entry of new firms will increase resource prices, particularly in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand. Higher resource prices result in higher long-run average total costs for all firms in the industry. These higher costs cause upward shifts in each firm's long-run ATC curve.

decreasing-cost industries

firms experience lower costs as their industry expands

Productive efficiency

requires that goods be produced in the least costly way. In the long run, pure competition forces firms to produce at the minimum average total cost of production and to charge a price that is just consistent with that cost. This is true because firms that do not use the best available (least-cost) production methods and combinations of inputs will not survive.

allocative efficiency

occurs when it is impossible to produce any net gains for society by altering the combination of goods and services that are produced from society's limited supply of resources

consumer surplus

the difference between the maximum prices that consumers are willing to pay for a product (as shown by the demand curve) and the market price of that product

producer surplus

the difference between the minimum prices that producers are willing to accept for a product (as shown by the supply curve) and the market price of the product. Producer surplus is the sum of the vertical distances between the equilibrium price and the supply curve

the main characteristics of pure monopoly:

1. Single seller A pure, or absolute, monopoly is an industry in which a single firm is the sole producer of a specific good or the sole supplier of a service; the firm and the industry are synonymous.
2. No close substitutes A pure monopoly's product is unique in that there are no close substitutes. The consumer who chooses not to buy the monopolized product must do without it.
3. Price maker The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a price maker (unlike a pure competitor, which has no such control and therefore is a price taker). The pure monopolist confronts the usual downsloping product demand curve. It can change its product price by changing the quantity of the product it produces. The monopolist will use this power whenever it is advantageous to do so.
4. Blocked entry A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type. But entry is totally blocked in pure monopoly.
5. Nonprice competition The product produced by a pure monopolist may be either standardized (as with natural gas and electricity) or differentiated (as with Windows or Frisbees). Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products' attributes.

barriers to entry

The factors that prohibit firms from entering an industry


the exclusive right of an inventor to use, or to allow another to use, her or his invention


Government may also limit entry into an industry or occupation through licensing

Rent-seeking behavior

any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's, or even society's, expense.

price discrimination,

the practice of selling a specific product at more than one price when the price differences are not justified by cost differences.

Price discrimination can take three forms

1. Charging each customer in a single market the maximum price she or he is willing to pay.
2. Charging each customer one price for the first set of units purchased and a lower price for subsequent units purchased.
3. Charging some customers one price and other customers another price

Monopoly power

The seller must be a monopolist or, at least, must possess some degree of monopoly power, that is, some ability to control output and price.

Market segregation

At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each of which has a different willingness or ability to pay for the product. This separation of buyers is usually based on different price elasticities of demand, as the examples below will make clear.

No resale

The original purchaser cannot resell the product or service. If buyers in the low-price segment of the market could easily resell in the high-price segment, the monopolist's price-discrimination strategy would create competition in the high-price segment. This competition would reduce the price in the high-price segment and undermine the monopolist's price-discrimination policy. This condition suggests that service industries such as the transportation industry or legal and medical services, where resale is impossible, are good candidates for price discrimination.

fair-return price

regulators set a regulated price that is high enough for monopolists to break even and continue in operation

Small market shares

Each firm has a comparatively small percentage of the total market and consequently has limited control over market price

No collusion

The presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is unlikely.

Independent action

With numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms. A single firm may realize a modest increase in sales by cutting its price, but the effect of that action on competitors' sales will be nearly imperceptible and will probably trigger no response.

product differentiation

Monopolistically competitive firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities, real or imagined, for their products.

four-firm concentration ratio

expressed as a percentage, is the ratio of the output (sales) of the four largest firms in an industry relative to total industry sales.

Herfindahl index

This index is the sum of the squared percentage market shares of all firms in the industry.

homogeneous oligopoly

the firms in the oligopoly produce standardized (homogeneous) products

differentiated oligopoly

the firms in the oligopoly produce differentiated products. Many consumer goods industries (automobiles, tires, household appliances, electronics equipment, breakfast cereals, cigarettes, and many sporting goods) are differentiated oligopolies

strategic behavior

self-interested behavior that takes into account the reactions of others.

mutual interdependence

a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry. So oligopolistic firms base their decisions on how they think their rivals will react.

game theory

The study of how people behave in strategic situations


cooperation with rivals

Diversity of oligopolies

Oligopoly encompasses a greater range and diversity of market situations than do other market structures. It includes the tight oligopoly, in which two or three firms dominate an entire market, and the loose oligopoly, in which six or seven firms share, say, 70 or 80 percent of a market while a "competitive fringe" of firms shares the remainder. It includes both differentiated and standardized products. It includes cases in which firms act in collusion and those in which they act independently. It embodies situations in which barriers to entry are very strong and situations in which they are not quite so strong. In short, the diversity of oligopoly does not allow us to explain all oligopolistic behaviors with a single market model

Complications of interdependence

The mutual interdependence of oligopolistic firms complicates matters significantly. Because firms cannot predict the reactions of their rivals with certainty, they cannot estimate their own demand and marginal-revenue data. Without such data, firms cannot determine their profit-maximizing price and output, even in theory, as we will see

price war

successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares.


a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge

Price leadership

a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings. Rather, a practice evolves whereby the "dominant firm"—usually the largest or most efficient in the industry—initiates price changes and all other firms more or less automatically follow the leader


a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.1 Demand shows the quantities of a product that will be purchased at various possible prices, other things equal. Demand can easily be shown in table form

law of demand.

A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded

substitution effect

suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive. The product whose price has fallen is now "a better deal" relative to the other products

demand curve

The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, in which, by convention, we measure quantity demanded on the horizontal axis and price on the vertical axis.

determinants of demand

Factors other than price that determine the quantities demanded of a good or service

determinants of supply

Factors other than price that determine the quantities supplied of a good or service

determinants of aggregate demand

Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve

determinants of aggregate supply

Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.

Number of Buyers

An increase in the number of buyers in a market is likely to increase demand; a decrease in the number of buyers will probably decrease demand. For example, the rising number of older persons in the United States in recent years has increased the demand for motor homes, medical care, and retirement communities.

normal goods

For most products, a rise in income causes an increase in demand. Consumers typically buy more steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products declines as their incomes fall. Products whose demand varies directly with money income are called superior goods, or normal goods

inferior goods

As incomes increase beyond some point, the demand for used clothing, retread tires, and third-hand automobiles may decrease, because the higher incomes enable consumers to buy new versions of those products. Rising incomes may also decrease the demand for soy-enhanced hamburger. Similarly, rising incomes may cause the demand for charcoal grills to decline as wealthier consumers switch to gas grills. Goods whose demand varies inversely with money income are called inferior goods

substitute good

one that can be used in place of another good

complementary good

one that is used together with another good

Increase in demand may be caused by.....

1. A favorable change in consumer tastes.
2. An increase in the number of buyers.
3. Rising incomes if the product is a normal good.
4. Falling incomes if the product is an inferior good.
5. An increase in the price of a substitute good.
6. A decrease in the price of a complementary good.
7. A new consumer expectation that either prices or income will be higher in the future

change in demand

a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand).

change in quantity demanded

a movement from one point to another point—from one price-quantity combination to another—on a fixed demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration


a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period

law of supply

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.

determinants of supply

(1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either right or left.

change in supply

The distinction between a change in supply and a change in quantity supplied parallels the distinction between a change in demand and a change in quantity demanded. Because supply is a schedule or curve, a change in supply means a change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.

change in quantity supplied

a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.

equilibrium price

(or market-clearing price) is the price where the intentions of buyers and sellers match. It is the price where quantity demanded equals quantity supplied


excess supply

productive efficiency

the production of any particular good in the least costly way.

allocative efficiency

the particular mix of goods and services most highly valued by society (minimum-cost production assumed)

price ceiling

sets the maximum legal price a seller may charge for a product or service. A price at or below the ceiling is legal; a price above it is not.

price floor

a minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not.

The government may cope with the surplus resulting from a price floor in two ways......

.......It can restrict supply (for example, by instituting acreage allotments by which farmers agree to take a certain amount of land out of production) or increase demand (for example, by researching new uses for the product involved). These actions may reduce the difference between the equilibrium price and the price floor and that way reduce the size of the resulting surplus.
If these efforts are not wholly successful, then the government must purchase the surplus output at the $3 price (thereby subsidizing farmers) and store or otherwise dispose of it.

price elasticity of demand.

For some products—for example, restaurant meals—consumers are highly responsive to price changes. Modest price changes cause very large changes in the quantity purchased. Economists say that the demand for such products is relatively elastic or simply elastic.


If a specific percentage change in price produces a smaller percentage change in quantity demanded

unit elasticity

The case separating elastic and inelastic demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same

perfectly inelastic demand

Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve

perfectly elastic demand

Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve

If demand is elastic.....

..... a decrease in price will increase total revenue

If demand is inelastic....

......a price decrease will reduce total revenue

market period

the period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied.

The short run in microeconomics....

...... is a period of time too short to change plant capacity but long enough to use the fixed-sized plant more or less intensively.

The long run in microeconomics ...... a time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to leave) the industry.

cross elasticity of demand

measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y).

Income elasticity of demand

measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.

The underlying purpose of antitrust policy (antimonopoly policy......

....... is to prevent monopolization, promote competition, and achieve allocative efficiency

Regulatory agencies

In the few markets where the nature of the product or technology creates a natural monopoly, the government established public regulatory agencies to control economic behavior

Antitrust laws

In most other markets, social control took the form of antitrust (antimonopoly) legislation designed to inhibit or prevent the growth of monopoly.

Sherman Act of 1890

This cornerstone of antitrust legislation is surprisingly brief and, at first glance, directly to the point. The core of the act resides in two provisions:
Section 1 "Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal."
Section 2 "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony" (as later amended from "misdemeanor").

The Sherman Act thus outlawed......

...........restraints of trade (for example, collusive price-fixing and dividing up markets) as well as monopolization

The Clayton Act of 1914

contained the desired elaboration of the Sherman Act. Four sections of the act, in particular, were designed to strengthen and make explicit the intent of the Sherman Act:
Section 2 outlaws price discrimination when such discrimination is not justified on the basis of cost differences and when it reduces competition.
Section 3 prohibits tying contracts, in which a producer requires that a buyer purchase another (or others) of its products as a condition for obtaining a desired product.
Section 7 prohibits the acquisition of stocks of competing corporations when the outcome would be less competition.
Section 8 prohibits the formation of interlocking directorates—situations where a director of one firm is also a board member of a competing firm—in large corporations where the effect would be reduced competition.

Federal Trade Commission Act

created the five-member Federal Trade Commission (FTC), which has joint Federal responsibility with the U.S. Justice Department for enforcing the antitrust laws. The act gave the FTC the power to investigate unfair competitive practices on its own initiative or at the request of injured firms.

Wheeler-Lea Act of 1938

amended the Federal Trade Commission Act to give the FTC the additional responsibility of policing "deceptive acts or practices in commerce." In so doing, the FTC tries to protect the public against false or misleading advertising and the misrepresentation of products. So the Federal Trade Commission Act, as modified by the Wheeler-Lea Act, (1) established the FTC as an independent antitrust agency and (2) made unfair and deceptive sales practices illegal.

Celler-Kefauver Act

amended the Clayton Act, Section 7, which prohibits a firm from merging with a competing firm (and thereby lessening competition) by acquiring its stock. Firms could evade Section 7, however, by instead acquiring the physical assets (plant and equipment) of competing firms. The Celler-Kefauver Act closed that loophole by prohibiting one firm from obtaining the physical assets of another firm when the effect would be reduced competition

1911 Standard Oil case

the Supreme Court found Standard Oil guilty of monopolizing the petroleum industry through a series of abusive and anticompetitive actions.

1920 U.S. Steel case

the courts established the so-called rule of reason, under which not every monopoly is illegal. Only monopolies that "unreasonably" restrain trade violate Section 2 of the Sherman Act and are subject to antitrust action. Size alone is not an offense. Under the rule of reason, U.S. Steel was innocent of "monopolizing" because it had not resorted to illegal acts against competitors in obtaining and then maintaining its monopoly power. Unlike Standard Oil, which was a so-called bad trust, U.S. Steel was a "good trust" and therefore not in violation of the law.

Alcoa case of 1945

the courts touched off a 20-year turnabout. The Supreme Court sent the case to the U.S. court of appeals in New York because four of the Supreme Court justices had been involved with litigation of the case before their appointments. Led by Judge Learned Hand, the court of appeals held that, even though a firm's behavior might be legal, the mere possession of monopoly power (Alcoa held 90 percent of the aluminum ingot market) violated the antitrust laws. So Alcoa was found guilty of violating the Sherman Act


assume that any firm with a very high market share will behave like a monopoly. As a result, they assert that any firm with a very high market share is a legitimate target for antitrust action. Structuralists argue that changes in the structure of an industry, say, by splitting the monopolist into several smaller firms, will improve behavior and performance


assert that the relationship among structure, behavior, and performance is tenuous and unclear. They feel a monopolized or highly concentrated industry may be technologically progressive and have a good record of providing products of increasing quality at reasonable prices. If a firm has served society well and has engaged in no anticompetitive practices, it should not be accused of antitrust violation just because it has an extraordinarily large market share. That share may be the product of superior technology, superior products, and economies of scale.

Why might one administration enforce the antitrust laws more or less strictly than another?

The main reason is differences in political philosophies about the market economy and the wisdom of intervention by government.

The treatment of mergers.....

....varies with the type of merger and its effect on competition

horizontal merger

a merger between two competitors that sell similar products in the same geographic market

vertical merger

a merger between firms at different stages of the production process

conglomerate merger

any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas

natural monopoly

exists when economies of scale are so extensive that a single firm can supply the entire market at a lower average total cost than could a number of competing firms.

public interest theory of regulation

industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society. The goal of such regulation is to garner for society at least part of the cost reductions associated with natural monopoly while avoiding the restrictions of output and high prices associated with unregulated monopoly. If competition is inappropriate or impractical, society should allow or even encourage a monopoly but regulate its prices. Regulation should then be structured so that ratepayers benefit from the economies of scale—the lower per-unit costs—that natural monopolists are able to achieve

legal cartel theory of regulation

In place of having socially minded officials forcing regulation on natural monopolies to protect consumers, holders of this view see practical politicians "supplying" regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival.

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