Monopoly Outline • Pure monopoly • Barriers to entry • Monopoly compared to competition • Natural monopoly • The regulatory dilemma • Monopolistic competition Pirated from: www. clt. astate. edu/crbrown/chapter 9 a. ppt
Pure monopoly A “pure” monopoly is a market structure in which a single seller accounts for 100 percent of market sales.
Pure monopolies are hard to find in the real world. Economists and judges as a rule believe a 90 percent market share is sufficient to constitute an “effective” monopoly.
Figure 9. 1
Notice the monopolist earns an economic profit equal to the shaded area. Question is: Should this situation not be ripe for entry of new firms? Not if there are factors which impede entry of new firms.
Barriers to entry: 2 definitions 1. “[A]nything which creates a disadvantage for potential entrants vis à vis established firms. The height of the barriers is measured by the extent to which, in the long run, established firms can elevate their selling prices above minimal average cost. . . without inducing potential entrants to enter” [Joe Bain, Industrial Organization, 2 nd ed. , p. 252]. 2. Barriers to entry into a market. . . can be defined to be socially undesirable limitations to entry of resources which are due to protection of resource owners already in the market” [Christian von Weizsäcker, Barriers to Entry, p. 13].
Examples of barriers to entry üAbsolute cost advantages Examples: Alcoa had access to low cost hydroelectric power in Pacific NW; Weyerhauser procured extraction rights to tracts of Douglas fir in 1901; International petroleum majors (Texaco, SOCAL, BP, et al) formed a pipeline consortium in California. üEconomies of scale: Dominant firm may enjoy cost advantages due to realization of scale economies in production, distribution, capital raising, or sales promotion.
üBarriers due to control of wholesale, retail distribution systems Examples: Control of wholesale diamond distribution by De. Beers; Control of advantageous retail shelf space by Proctor and Gamble, Kellogs. üBarriers due to patents, copyrights, trademarks, and other legal barriers Examples: Xerox’s patent on xerography; Polaroid’s patent on instamatic photography üBarriers due to product differentiation/brand power Examples: Cigarettes, pain relievers, designer jeans, athletic wear, batteries, soft drinks
Strategic Barriers üAlcoa’s restrictive covenants with hydroelectric suppliers. üStandard Oil’s “secret rebate” policy with the railroad companies. ü“Lease-only” policy of IBM, United Shoe Machinery, International Salt üIBM’s continual design modification was designed to forestall entry of firms such as Calcomp that marketed plugcompatible peripherals—e. g. , tapes and line printers. üMicrosoft charges PC makers a royalty for every computer shipped—regardless of whether the machine has a Windows operating system installed. üMicrosoft requires that Explorer icon appear on desktop in initial boot up sequence.
Price, Cost A PM Monopoly compared to Competition Market Demand B H PC Notice that for each additional unit produced between QM and QC, Demand (marginal benefit) is higher than marginal cost. E MC = AC MR 0 QM QC Output
Results summarized Price Quantity Econ Consumer Surplus Dead Weight Competition PC QC zero PCAE zero Monopoly PM QM PCPMBH PMAB BHE
Dead weight is a measure of loss due to resource misallocation —it is equal to the surplus lost to consumers which is not captured by the producer.