Monopolies
Types of Market Structure
• Four principal models of market structures:
1. Perfect Competition
– Many producers sell identical product
2. Monopoly
– Single producer sells a single, undifferentiated
product
3. Oligopoly
– Few producers, more than one but not a large
number, sell products that are identical or
differentiated
4. Monopolistic competition
– Many producers each sell a differentiated product
Types of Market Structures
• System is based on:
• 1. Number of producers in the market
• 2. whether the goods offered are
identical or differentiated
– Differentiated goods are goods that are
different but considered somewhat
substitutable by consumers (Coke vs.
Pepsi)
Types of Market Structure
Are Products Differentiated?
Yes
No
One
How Many
Producers
Are There?
Monopoly
Oligopoly
Few
Many
Not applicable
Perfect
competition
Monopolistic
competition
Meaning of Monopoly
A monopolist is a firm that is the only
producer of a good that has no close
substitutes. An industry controlled by a
monopolist is known as a monopoly, e.g. De
Beers (diamond supplier from mines in
South Africa)
The ability of a monopolist to raise its price
above the competitive level by reducing
output is known as market power.
Monopoly
• True monopolies don’t exist (exceptions
of course in pharmaceuticals) today due
to legal obstacles
– Antitrust Laws – prevent monopolies from
emerging
• Oligopolies are more common
– Ex. Automobiles, airline tickets
What Monopolists Do….
• How did Cecil Rhodes (De Beers
Company) consolidate South African
diamond producers into a single
company?
• 1. Monopolist moves up the demand
curve by reducing quantity supplied to a
point which the quantity produced is
lower than the price which is higher
than under perfect competition
• Known as MARKET POWER
What a Monopolist Do….
Price
P
2. … and raises
price.
M
P
S
M
C
C
D
QM
QC
1. Compared to perfect
competition, a monopolist
reduces output…
Quantity
What a Monopolist Do….
• Market power is what monopolies are
all about
• Wheat farmers have no market power,
there are thousands of wheat farmers
• Water Utility Companies do have market
power, you have to pay the price they
charge for water, you have no other
company to use!
What a Monopolist Do….
• Monopolists reduce output and raise
prices compared to the perfectly
competitive industry level to create
profit
• What allows monopolists to be
monopolists?
Why do Monopolies Exist?
• Due to barriers of entry:
• 1. Control of a scarce resource or
input
• 2. Increasing returns to scale
• 3. technological superiority
• 4. government-created barriers
1. Control of a scarce resource or input
• Monopolists control a resource or input
crucial to an industry can prevent other
firms from entering its market
• De Beers controlled all the mines that
produced the bulk of the world’s
diamonds
2. Increasing returns to scale
• Local utility companies are monopolies,
why don’t rival companies compete to
provide alternatives?
• Due to increasing returns to scale:
– Average total cost falls as output increases,
firms tend to grow larger which then these
companies have a cost advantage over any
potential entry to the market and thus….a
monopoly can start
2. Increasing returns to scale
• Natural monopolies are created and
sustained by increasing returns to scale
• Defining characteristic is that it
possesses increasing returns to scale
over the range of output that is relevant
for the industry
• Examples of a natural monopoly:
– Water, gas, electric, local land-line phone
service and cable television
2. Increasing Returns to Scale Create Natural Monopoly
Price
, cost
Natural monopoly.
Average total cost is
falling over the relevant
output range
Natural
monopolist’s
break-even price
ATC
D
Quantity
Relevant output range
3. Technological Superiority
• A firm that maintains a consistent
technological advantage over potential
competitors can establish itself as a
monopolist
• Ex. 1970s-1990s, Intel maintained a
consistent advantage over potential
competitors
3. Technological Superiority
• Although, in certain high-tech industries,
technological superiority is not a guarantee
of success against competitors
• Network externalities – a condition that
arises when the value of a good to the
consumer rises as the number of people
who also use the good rises
– Ex. Microsoft – a monopolist due to the
phenomenon of network externalities
4. Government-Created Barriers
• Patent – inventor given the sole right to make,
use, or sell that invention for a period of 16-20
years (depending on country)
– Only given to new products, such as drugs or devices
– Ex. iPhone
• Copyright – gives the creator of a literacy or
artistic work the sole rights to profit from that
work, usually for period equal to the creator’s
lifetime plus 70 years
– Ex: NFL, Super Bowl Logo, Coca Cola Logo, Pepsi
Logo
4. Government-Created Barriers
• Why Patents and Copyrights?
• Due to allowing incentives for
inventors and encouraging invention
and creativity
Notes on Monopolies
Types of Market Structure
• Four principal models of market structures:
1. Perfect Competition
2. Monopoly
3. Oligopoly
4. Monopolistic competition
Types of Market Structures
• System is based on:
• 1.
• 2.
– Differentiated goods are goods that are
different but considered somewhat
substitutable by consumers (Coke vs.
Pepsi)
Types of Market Structure
Are Products Differentiated?
No
One
How Many
Producers
Are There?
Few
Many
Yes
Meaning of Monopoly
A monopolist is a firm that is the only
producer of a good that has no close
substitutes. An industry controlled by a
monopolist is known as a ____________,
e.g. De Beers (diamond supplier from mines
in South Africa)
The ability of a monopolist to raise its price
above the competitive level by reducing
output is known as __________________.
Monopoly
• True monopolies don’t exist (exceptions
of course in pharmaceuticals) today due
to legal obstacles
• Oligopolies are more common
What Monopolists Do….
• How did Cecil Rhodes (De Beers
Company) consolidate South African
diamond producers into a single
company?
• 1. Monopolist moves up the demand
curve by reducing quantity supplied to a
point which the quantity produced is
lower than the price which is higher
than under perfect competition
• Known as __________________
What a Monopolist Do….
Price
P
M
P
S
M
C
C
D
QM
QC
Quantity
What a Monopolist Do….
• Market power is what monopolies are
all about
• Wheat farmers have no market power,
there are thousands of wheat farmers
• Water Utility Companies do have market
power, you have to pay the price they
charge for water, you have no other
company to use!
What a Monopolist Do….
• Monopolists reduce output and raise
prices compared to the perfectly
competitive industry level to create
profit
• What allows monopolists to be
monopolists?
Why do Monopolies Exist?
• Due to barriers of entry:
–1.
–2.
–3.
–4.
1. Control of a scarce resource or input
• Monopolists control a resource or input
crucial to an industry can prevent other
firms from entering its market
2. Increasing returns to scale
• Local utility companies are monopolies,
why don’t rival companies compete to
provide alternatives?
• Due to increasing returns to scale:
2. Increasing returns to scale
• Natural monopolies are created and
sustained by increasing returns to scale
• Defining characteristic is that it
possesses increasing returns to scale
over the range of output that is relevant
for the industry
• Examples of a natural monopoly:
2. Increasing Returns to Scale Create Natural Monopoly
Price
, cost
ATC
D
Quantity
3. Technological Superiority
• A firm that maintains a consistent
technological advantage over potential
competitors can establish itself as a
monopolist
3. Technological Superiority
• Although, in certain high-tech
industries, technological superiority is
not a guarantee of success against
competitors
• Network externalities – a condition that
arises when the value of a good to the
consumer rises as the number of people
who also use the good rises
4. Government-Created Barriers
• Patent – inventor given the sole right to
make, use, or sell that invention for a period
of 16-20 years (depending on country)
• Copyright – gives the creator of a literacy or
artistic work the sole rights to profit from
that work, usually for period equal to the
creator’s lifetime plus 70 years
4. Government-Created Barriers
• Why Patents and Copyrights?