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Ch. 24: Pure Monopoly

Ch. 24: Pure Monopoly. Characteristics A single firm is the sole producer or supplier (firm = industry) 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

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Ch. 24: Pure Monopoly

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  1. Ch. 24: Pure Monopoly • Characteristics • A single firm is the sole producer or supplier (firm = industry) • 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

  2. 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

  3. 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

  4. 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

  5. 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 product/service Prof. Ana Corrales ECO 2023 Notes

  6. Examples of Price Discrimination • 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

  7. Last Word • De Beers’ Diamonds: Are Monopolies Forever? • Page 456 Prof. Ana Corrales ECO 2023 Notes

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

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