Monopolies
Monopolies
•
•
•
•
Single supplier for a good or service
Barriers exist for entry into market for firms
DeBeers-diamonds
Problem- monopolies can charge high $$$ and
take advantage of consumers
• United States has outlawed/regulated
monoploies
Forming a monopoly
• Single seller in market- but there are different
types of monopolies
• Economies of scale- start up costs high, but
average cost fall with each new unit produced
• Figure 7.3 compares economies of scale
• Example- hydroelectric plant
• Start up- a dam- very expensive
• Average cost will dissipate over time
Natural monopolies
• A market where one firm is most efficient for
industry
• Competition would drive 2 firms out of market
because of lack of profit
• Public Water works-pipes, work, quality
• Government regulation on utilities
• Natural monopolies agree to govt oversight
• Technology can change- cell phones- no wires
Government monopolies
• A monopoly created by government
• Patents- exclusive rights to a good or service
• Book- Leland pharmaceuticals develops
asthma medicine- get a 20 year patent
• Guarantees company opportunity to profit
from their own research- R&D in companies
• Franchise- contract issued by local authority
allowing single firm exclusive rights- ATL
monopolies
• Licensing- government requires a license into
market- radio, television, parking
• Industrial organizations- MLB, NFL, NHL, NBA
• Allows efficiency of industry
• Also allows owners opportunity to abuse with
prices etc,,,
• Oakland Raiders
• LA- back to Oakland- new stadium , etc
Output decisions
• Monopolies- usually produce fewer good at
charge higher prices
• React differently to perfectly competitive
markets
• Reason- falling marginal revenue.
• Keep prices high and supply low. ALL
CONSUMERS CHARGED SAME PRICE.
• Seems unfair- but it is how the company can
continue to produce good – incentive
Price discrimination
• When monopolists divide customers into
categories and charge different prices.
• Sets price high- sells only to few
• Set price low- popular but limited profit
• Market Power-ability to control prices and and
total market output.
• Price discrimination examples- discounted
airfare, manufacturer’s rebates,
senior/student discount, child fly, eat stay free
Limits on price discrimination
• Must have 3 conditions
• 1. Firms must have control over price- usually
rare in highly competitive markets
• 2. Distinct customer groups- guess the price
curve and elasticity for these groups
• 3. Difficult resale- goods usually consume on
the spot .
• Some feel price discrimination is wrong