Ch. 24: Pure Monopoly

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Ch. 24: Pure Monopoly Powered By Docstoc
					Ch. 24: Pure Monopoly
   Characteristics
    A  single firm is the sole producer or supplier (firm =
     There are no close substitutes
     Monopolist controls the total quantity supplied and
      price  “price maker”
     Monopolist has no immediate competitors b/c barriers
      keep them from entering
     Nonprice competition: Product may be standardized
      or differentiated

                      Prof. Ana Corrales ECO 2023 Notes
Barriers to Entry
   Economies of Scale
       Modern technologies allows for extensive Economies of Scale
       A firm’s L-R ATC will decline over the output range
   Legal Barriers: Patents & Licenses
       Patents: Exclusive right of inventor to use the invention
       Licenses: Government limits entry to industry or occupation
        through licensing
   Ownership/Control of Essential Resources
       A firm can prohibit entry of rival firms
   Pricing/Other Strategic Barriers
       Monopolist can create an entry barrier by cutting price,
        increasing advertising or other strategic action making it very
        difficult for new entrant to succeed

                            Prof. Ana Corrales ECO 2023 Notes
Natural Monopoly
   An industry in which economies of scale
    are so great that a single firm can produce
    the product at a lower ATC than if more
    than one firm produced the product

                 Prof. Ana Corrales ECO 2023 Notes
Policy Options
   If the monopoly is achieved & sustained through anti-
    competitive actions, creates substantial economic
    inefficiencies, and appears to be long-lasting, the
    government can file charges against the monopoly under
    anti-trust laws
   If the monopoly is a natural monopoly, society can allow
    it to continue to expand. If no competition arises,
    government may regulate its prices and operations
   If monopoly is unsustainable over the long-run, society
    can ignore it

                     Prof. Ana Corrales ECO 2023 Notes
Price Discrimination
   The practice of selling a specific product at more than
    one price when the price differences are not justified by
    cost differences
   Conditions
       Monopoly power: The seller must possess the ability to control
        output and price
       Market segregation: At a relatively low cost, the seller must be
        able to segregate buyers into distinct classes, each of which has
        a different willingness/ability to pay for product
       No resale: The original purchaser cannot resell the

                          Prof. Ana Corrales ECO 2023 Notes
Examples of Price
 Airline industry charges different fares to
  business v. leisure travelers
 Movie ticket prices vary by age, military
  service, time movie is shown
 Tickets to professional sporting events
  vary by age (baseball)
 International Trade

                Prof. Ana Corrales ECO 2023 Notes
Last Word
   De Beers’ Diamonds: Are Monopolies
     Page   456

                   Prof. Ana Corrales ECO 2023 Notes
Ch. 24 Study Questions
 2
 10
 13

          Prof. Ana Corrales ECO 2023 Notes

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