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Teaching notes for chapter 5

One of the important points this chapter attempts to make is that monopoly is not a zero-one concept: it all depends on how the market is defined. In fact, what really matters is not so much whether a firm dominates one hundred percent or less than one hundred percent of the market; the important thing is whether the firm has the power to set prices above marginal cost.

This distinction plays an important role in the way the whole book is structured. Many IO texts--e.g., Tirole's The Theory of Industrial Organization--are divided into two parts: monopoly and oligopoly. Such distinction is not made here. Each issue (price discrimination, advertising, etc) is approached both from the monopoly and the oligopoly point of view. The underlying idea is that the important distinction is not so much between monopoly and oligopoly but rather between firms with market power and firms without market power. (This is not exactly right, but is probably a good first-order approximation.)

The above distinction is also important when it comes to discuss the issue of regulation. Regulation is called for not because a firm is a monopolist but rather because a firm commands excessive market power--and even then the question has to be asked whether regulation does more good than bad (cf the Microsoft case).

It should finally be noted that the discussion of regulation in this chapter is very summary. In courses where regulation is given a bigger weight, instructors may want to assign additional readings on the subject. There are some excellent introductory texts covering regulation, for example, Harrington, Vernon and Viscusi, The Economics of Regulation, MIT Press.

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