Question

In a perfectly competitive firm the firm profit maximizes where P=MR=MC . In a monopoly firm , the firm profit maximizes where P> MR = MC. Why does that allow a monopoly firm to make a larger economic profit in many cases? Without anti-trust laws, why would firms try to eliminate competing firms? (The attempt by ATT to buy out Direct TV for example.)

Answer 1

Because the condition P > MR suggests that P > MC also. This implies that when AC < MC, and AC is falling, a price that is greater than MC, becomes greater than AC as well. Profits are excess of price over AC. Hence the fact that monopolies are able to sell at a price higher than MC also indicates that price will be greater than AC and so economic profit is greater. The more we have Price greater than MC, the more profit monopoly can earn

Without anti-trust laws, firms try to eliminate competing firms because by restricting competition, they are limiting substitutes of their goods which makes demand inelastic. This increases the market power of existing firms over the price to be charged and quantity to be supplied.