Transcript Pure monopoly

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/chapter9a.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
Cost and Revenue per Unit
AC
Industry
demand
Pm
AC
MR
Qm
MC
AC
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, 2nd
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
Absolute 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.
Economies of scale: Dominant firm may enjoy cost
advantages due to realization of scale economies in
production, distribution, capital raising, or sales promotion.
Barriers due to control of wholesale, retail distribution
systems
Examples: Control of wholesale diamond distribution by
DeBeers; Control of advantageous retail shelf space by
Proctor and Gamble, Kellogs.
Barriers due to patents, copyrights, trademarks, and
other legal barriers
Examples: Xerox’s patent on xerography; Polaroid’s patent
on instamatic photography
Barriers due to product differentiation/brand power
Examples: Cigarettes, pain relievers, designer jeans, athletic
wear, batteries, soft drinks
Strategic Barriers
Alcoa’s restrictive covenants with hydroelectric suppliers.
Standard Oil’s “secret rebate” policy with the railroad
companies.
“Lease-only” policy of IBM, United Shoe Machinery,
International Salt
IBM’s continual design modification was designed to
forestall entry of firms such as Calcomp that marketed plugcompatible peripherals—e.g.,tapes and line printers.
Microsoft charges PC makers a royalty for every computer
shipped—regardless of whether the machine has a Windows
operating system installed.
Microsoft requires that Explorer icon appear on desktop in
initial boot up sequence.
Price, Cost
Monopoly compared to
Competition
A
Market
Demand
PM
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
Dead
Surplus
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.