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Economics Chapter 8

by: Ashley Albers

Economics Chapter 8 Economics 1051

Ashley Albers
GPA 3.3

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Chapter 8 notes, monopoly
General Economics
George Chikhladze,Martha Steffens
Class Notes
economics 1051, monopoly
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This 3 page Class Notes was uploaded by Ashley Albers on Monday March 7, 2016. The Class Notes belongs to Economics 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Spring 2016. Since its upload, it has received 19 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.

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Date Created: 03/07/16
Chapter 8: Pure Monopoly An introduction to pure monopoly  Single seller – a sole producer  No close substitutes – unique product  Price maker – control over price  Blocked entry – strong barriers to entry block potential competition  Monopolists (any firm with market power) will engage in price discrimination o Charge different prices to different consumers for same product or service  Examples of Monopoly o Public Utility companies (natural monopolies)  Natural gas  Electric  Water o Near monopolies  Intel  De Beers  Diamonds are forever  Owns most of diamond mines in Africa  Barriers to Entry o Barrier to entry: a factor that keeps firms from entering an industry  Economies of scale (natural monopoly)  Decreasing industry average total cost  Means that one firm can supply output at cheaper cost than 2 or more can  Legal barriers  Patents and licenses  Ownership of essential resources (De Beers)  Pricing  Network Effects  Consumers derive greater benefit form joining a network that many other consumers belong to or use  Subsequently, a firm with a larger network offers greater benefits to a consumer. At the end everyone decides to join the same network  Windows OS, Spreadsheet software, Blu-Ray vs. HD DVD o Format wars: Blu-Rays vs. DVD; VHS tapes vs. Beta Tapes; PlayStation vs. Xbox  Monopoly Demand o The pure monopolist is the industry o The demand curve is the market demand curve  Consumers can still say I don’t want to pay that much  Down sloping demand curve o Monopolist faces a trade off:  (Volume vs. margin tradeoff)  Charging high price -> low sales  Charging low prices -> high sales o In general, monopolist will choose a price that is above MC (or competitive price) o It will produce less quantity than competitive industry o The ability to raise price above MC depends on market power monopoly has o Why do perfectly competitive firms have to sell exactly MC? o Ultimately how elastic your customers are depend outside options they have or substitutes  Misconceptions of Monopoly Pricing o Not highest price  Still have constraints by consumer demand o But highest price among all market structures o Purely competitive market structure would give the lowest price and monopoly structure the highest price o Oligopoly market may yield the highest (monopoly price) but only if the folks are able to collude and form a cartel  OPEC: Organization of Petroleum Exporting Countries o Possibility of loss  Monopolies and Antitrust Policy o Enforcement of these laws falls under department of justice and federal trade commission o Antitrust Laws (Sherman Act of 1890)  This is when economy was dominated by cartels or huge conglomerates and there was little competition  Rockefeller, JP Morgan, etc.  Break up the firm (Standard Oil, AT&T)  Broke up standard oil into smaller companies  Divorce companies to smaller ones  Its illegal when you abuse your power and prevent other firms from entering  Can abuse customer but not rival firms o Regulate It (Microsoft  Either regulate behavior or  Government determines price and quantity (natural monopolies) o Ignore It  Let time and markets get rid of monopoly  Price discrimination o Discrimination  Charging different buyers different prices or charging different prices based on volume  Price differences are not based on cost differences  Examples  Business travels  Movie theatres  Coupons  International trade  Car dealerships  Quantity discounts also qualify as price discrimination o Conditions for success  Monopoly power  Market segregation  No resale (arbitrage) 


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