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14 -- Part 3: Monopoly and Monopolistic
There are platform firms.
Both firms offer services that connect people.
They have data on their users.
Every time you "friend" someone, play a game, or click on an advertisement on Facebook, it is collecting data about you that it can exploit, or sell to other firms.
If you can't figure out how a company makes money, it's likely you're not the customer.
It is a platform business.
Amazon provides more than just the marketplace.
It will pack and ship other firms' products.
It also sells on its own.
Platform monopolies make their money both from the fees they charge for their platform and from exploiting the data and information they gain in the process of selling goods or making the market.
Potential problems of fairness can be created by the fact that firms that use the Amazon Marketplace platform can also have Amazon as their partner.
There is a natural push for platform businesses to gain a significant share of the market and become platform monopolies because it is often more efficient for people to gather on a single platform.
There is a first-mover advantage in the markets.
As more and more people use the platform, there is a first-mover advantage for the business.
The larger the network, the more valuable the service is.
Market Structure was the only person in the world on Facebook.
Facebook's value to communication grows as the number of people on it increases.
The Windows operating system is an example of a product with network externalities.
If many other people use it, you can easily communicate with other Windows users and purchase software based on that platform.
The bigger platform firms get, the more helpful they are to the people who use them, the more valuable they become, and the more difficult it is for new firms to enter the market.
There is a lot of debate about how public policy should deal with platform monopolies and standard monop olies.
It would make sense to allow platform firms to grow into monopolies due to gains in efficiency.
If a competitive out come is to be attained, care must be taken to ensure that there will be countervailing power.
Platform businesses provide enormous dynamic drive for the economy, but they are also amassing significant power, both in their ability to earn profits and to affect society.
The question is how they see the public interest.
An example of the questions posed can be seen in Facebook's treatment of Russian entities that posted fake news during the U.S. presidential election.
The financial bottom line was the primary criterion for ads on Facebook.
Politicians didn't like that and expressed concern, and after the election, Facebook changed its procedures to focus on the social bottom line.
There are enormous advantages and gains to be had from platform monopolies.
Some argue that they reduce competition, but they create new problems.
Public policy will be concerned with dealing with these problems effectively in the next decade.
The two extremes of market structure are perfect competi tion and monopoly.
Monolithic competition and oligopoly are what most real-world market structures fall under.
I don't like monopolistic competition in this section.
I discuss oligopoly in the next chapter.
Let's look at each in a different way.
It's reasonable to take into account your competitors' reaction to the price you set when there are only a few sellers.
It isn't when there are many sellers.
Firms don't take into account rivals' reac tions in monopolistic competition.
This is an example.
Dove, Irish Spring, Yardley's Old English, and so on are some of the different types of soap.
Dove won't pay much attention to Yardley's reaction when it runs a sale.
One firm can't worry about the reaction of any specific firm because there are so many.
monopolistic competition is what characterizes the soap industry.
Monopolis tic competition has a "many sellers" characteristic.
Product differentiation has a monopolistic aspect.
The basic ingredients of ketchup differ among brands.
For me, the only real sauce is Heinz.
I didn't notice.
If the marginal benefit of advertising outweighs the marginal cost, then advertising to increase the monopoly power of a competitor makes sense.
Firms must make their decisions as if they had no effect on other firms despite the fact that their goods are similar but differentiated.
In perfect competition, price is the only aspect of competition that matters.
Firms try to compete on perceived attributes and advertising is another form of competition.
Service and distribution outlets are other dimensions of competi tion.
The multiple dimensions of competition make it difficult to analyze a specific industry, but the alternative methods of competition follow the same two general decision rules as price competition.
There must be no significant entry barriers if a monopolistically competitive market is to meet the last condition.
Barriers to entry create the potential for long-run economic profit and prevent competitive pressures from pushing price down to average total cost.
Other firms would enter until there was no economic profit.
monopolistic competitors have a strong incentive to advertise since they can sell all they want at the market price.
Advertising plays an important role in differentiating their products from the others.
The goal of advertising is to shift the firm's demand curve to the right.
It is possible for advertising to make it more inelastic.
That allows the firm to sell more, to charge a higher price, or both.
Firms advertise to move the demand curve further out than it would be if they weren't.
The average total cost curve is shifted by advertising.
In deciding how much to advertise, a firm must consider both the cost and effect of advertising.
If the marginal revenue of advertising surpasses the marginal cost of advertising, it's a good thing for the firm.
The degree of trust we put in products is influenced by advertising.
The names convey a sense of what the product is and how much trust we have in it.
Most people would pay more for a snack than for something.
Firms in the United States spend about $220 million on advertising each year.
A 30-second commercial during the Super Bowl can cost $5 million.
Firms' costs are increased by advertising, but they also differentiate their products.
There is a certain amount of waste.
The waste shows up in the graph because monopolistic com petitors don't produce at the minimum point of their average total cost curve.
Buying names we know and having goods that are slightly different from one another gives us a sense of trust.
I know that there's little difference between generic aspirin and Bayer aspirin.
Sometimes I buy aspirin even though it costs more.
Edward Chamberlin and Joan Robinson believed that the difference between the cost of a perfect competi tor and the cost of a monopolistic competitor was the cost of difference.
It's a benefit to consumers if they are willing to pay that cost.
We need to be careful about drawing any implications from generic products.
The cost of advertising and product differentiation is included in the average total cost for a monopolistically competitive firm.
The theory of imperfect competition was called by Joan Robinson, an economist from Cambridge, England.
Whether we as consumers are better off with as much differentiation as we have, or whether we'd all be better off if all firms produced a generic product at a lower cost is debatable.
A good introduction to the multiple dimensions of monopolistic competition can be gained by using the standard two-dimensional graph.
We look at the characteristics of monopolistic competition and see what implication they have for the analysis.
A monopolistic competitor faces a downward-sloping demand curve because of the firm's monopoly power.
Monopolists will face a marginal revenue curve that is below price if they make decisions about output because of the downward-sloping demand curve.
The marginal cost will be less than the price if it is profit-maximizing.
In Figure 14-8(a), we consider that case.
This demand curve is part of the mar ket demand curve.
M is the level of output at which marginal revenue intersects marginal cost.
This price is more than the marginal cost.
We've done nothing more than reproduce the monopolist's decision.
The long run equilibrium.
The difference between price and average total cost is what determines profit or loss.
Let's say that the monopolistically competitive firm is making a profit.
Two adjust ments would be set in motion by this profit.
It would draw in new entrants.
The portion of the market demand curve that shifted to the left was caused by some of the firm's customers defecting.
Second, to try to protect its profits, the firm would likely increase expenditures on product differentiation and advertising to offset that entry to shift the demand curve back to the right.
The average total cost curve would be shifted up by these expenditures.
The two adjustments would continue until the profits disappeared and the new demand curve was in line with the new average total cost curve.
A firm can't make long-run economic profit if it's monopolistic.
If both the monopolistic competitor and the perfect competitor make zero economic profit in the long run, it might seem that they're the same.
The zero economic profit condition means that the marginal cost curve equals price, and the perfect competitor sees its demand curve as perfectly elastic.
The monopolistic competitor has a downward-sloping demand curve.
Since the demand curve is sloping downward, the minimum point of the average total cost curve can't be at the profit-maximizing level of output.
The price is higher than the cost.
Increasing market share is a rele vant concern since it lowers average cost.
The monopolistic competitor could raise its profit if it could expand its market.
Increasing output doesn't offer a benefit in the form of lower average cost for a perfect competitor.
A perfect competitor wouldn't care about the firm's percentage of total sales in the market.
There is an important difference between monopoly and monopolistic competition.
One important difference is that they are almost the same.
A monopolist that makes zero profit is a monopolistic competitor.
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