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MONOPOLY

MONOPOLY. MONOPOLY. One producer Firm = Industry. BARRIERS to ENTRY. Patents Franchises Resource ownership Purchase Lawsuits Economies of scale. BARRIERS to ENTRY. Patents Exclusive ability to produce (20 years) Government granted Reward for invention. BARRIERS to ENTRY.

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MONOPOLY

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  1. MONOPOLY

  2. MONOPOLY • One producer • Firm = Industry

  3. BARRIERS to ENTRY • Patents • Franchises • Resource ownership • Purchase • Lawsuits • Economies of scale

  4. BARRIERS to ENTRY • Patents • Exclusive ability to produce (20 years) • Government granted • Reward for invention

  5. BARRIERS to ENTRY • Franchises • Exclusive right to supply • Government granted

  6. BARRIERS to ENTRY • Ownership of key resource • Owner doesn’t share with others • Ex. DeBeer diamonds

  7. BARRIERS to ENTRY • Acquisition • Buy out competition • Lawsuit • Sue competition

  8. BARRIERS to ENTY • Economies of Scale • Existing firms expand to take advantage • Newly developing firms don’t have resources • Ex. Auto industry • Natural Monopoly • One firm can supply market more cheaply • Gov’t. allows and regulates • Ex. Power industry

  9. DEMAND CURVE • Downsloping • Must lower P to increase Qd • MR is less than P • MR curve below D curve

  10. PROFIT-MAXIMIZATION • Same rule: • Produce Q where • MC = MR if • P > (or =) to AVC • If • P > ATC: profits • P > AVC: loss minimization

  11. PROFIT-MAXIMIZATION • Profits • Average = P – ATC • Total = Average profits x Q

  12. MONOPOLY CHARACTERISTICS • Price – maker • Restricts production to most profitable level • Does not charge highest Price • That would be for 1 unit – not profitable

  13. MONOPOLY CHARACTERISTICS • Long-run Profits expected • Only producer • Short-run Losses possible

  14. MONOPOLIST P > ATC Production inefficiency P > MC Allocative inefficiency COMPETITOR P = ATC Production efficiency P = MC Allocative efficiency MONOPOLIST vs COMPETITOR

  15. MONOPOLIST’S POWER • Price Discrimination • Different price for same product for different customers • Must be able to separate customers OR • Service – non-transferable

  16. MONOPOLIST’S LIMITATIONS • Still restricted by D • Elastic D • Potential competition • Research and development by others • Regulation issues • Structural – based on market share • Behavioral – abuse of power

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