Not just a game.
What is a monopoly?
• A monopoly is a market dominated by
a single seller.
• It has one seller and many members
of buyers.
• Monopolies are able to take
advantage of the market, therefore
they can charge high prices.
• Barriers to entry are the principle
condition that allows monopolies to
exist.
*In 1890 The
Sherman
Antitrust Act was
passed to
prohibit abusive
monopolies.
Economies of Scale
• Factors that cause a producer’s average cost
to drop as production increases.
• With no economies of scale the average cost
of producing each good increases as output
increases
Effect of Economies of Scale
Natural Monopoly
• Market that runs most efficiently when one large
firm provides most of the output.
• If a second firm enters a market, competition will
drive down the market price.
• The government steps in to ensure that the firms
wouldn’t waste resources building additional
plants when only one is needed.
• A firm with natural monopoly agrees to let
government control the prices it can change and
what services it must provide.
Natural Monopoly Examples
• Ex. Public Water- If many different companies
decided to produce water, they would set up
overlapping pipes and pumping stations to
deliver water to the same place. They would
be wasting a lot of resources and money. So
natural monopoly would have to take place.
Government Monopoly
• Monopoly created by the government
• The government creates barriers to entry in
the market.
Technological Monopolies
• Government can give a company monopoly
power by issuing a patent.
• Patent- gives a company exclusive right to sell
a good or service at a specific date or time.
• Patents guarantee that companies can profit
from their own research without competition.
• Firms that have patents are allowed to set
prices that maximize their opportunity to
make a profit.
Technological Monopolies Examples
• Ex. Choc O’late, who works for Hershey's
Chocolate Company, invents a new chocolate
bar. The FDA will give Hershey’s a patent for
20 years, for them to exclusively sell Mr.
O’late’s chocolate bar.
Franchise
• Contract that gives a company the right to sell
its good.
• A franchise is a chain company, such as
Mcdonalds, Target or Walmart.
License
• Granting firms the right to operate a
business.
• A license is the right to practice.
• Just like your drivers license allows
you the right to operate a car, a
government issued license grants a
firm the right to operate a business.
License
• Ex. Kim and Jerry just
graduated from
Veterinary school and
they want to own
their own veterinary
office. First they must
get a license to be
legal vets. So they can
fulfill their dream of
saving animals lives.
Price Discrimination
• A monopolist may be able to divide
consumers into two or more groups and
charge different prices to each group… whoa.
• As a basic principle consumers set a
maximum price they will pay for a product.
• Monopolists will charge one group a higher
price because that group is willing to pay
more.
Price Discrimination Example
• Mr. Alka-Seltzer comes to Arlington High
School to sell his action figures with life like
hair, and he notices that Tommy and Sara are
buying a lot of action figures each week.
Whereas Shelly and Miguel are buying only a
few each week. Tommy and Sara are buying
twice as many toys as Shelly and Miguel so Mr.
Alka- Seltzer decides that if he charges less to
Shelly and Miguel he will make more money.
Market Power
• The ability to control prices and total market
output.
• Market power and price discrimination will be
found in any market structure except for
perfect competition.
• The ability of a company to change prices and
output like a monopolist.