A market is initially monopolized by a firm that produces the profit-maximizing quantity QM and charges the corresponding price PM on the demand curve. Seeking to end the firm’s monopoly reign of terror, the government initiates an antitrust case and eventually, through intrepid and relentless lawyering, forces a settlement in which the firm will be broken up into a duopoly (two firms competing in the market). Assume that the duopoly market outcome is closer to, but not quite at, the competitive market equilibrium. Clearly label the monopoly and duopoly outcomes on a supply and demand graph. Clearly state how the settlement affects the equilibrium price and quantity in the market. Also, clearly tabulate ΔCS, ΔPS, and ΔSS using appropriately labeled points on the graph. Is the settlement an actual Pareto improvement over the monopoly result? Is it a potential Pareto improvement? Explain. Label the efficiency gain on the graph.

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Changes in Equilibrium Price The settlement likely leads to a decrease in equilibrium price P compar... View the full answer