Economics Chapter 8
Economics Chapter 8 Economics 1051
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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)