The market structure of monopoly is explored in this chapter.
Many people think that monopolists always make money.
How much a monopolist can charge is regulated by the law of demand.
People buy less when a monopolist charges more.
A monopolist may experience a loss if demand is low.
Many markets exhibit some form of monopolistic behavior, so it's important to study this mar ket structure.
The National Football League, the United States Postal Service, and some small- town businesses are all examples of monopoly.
In this chapter, we look at the ways in which monopoly power can be eroded.
The result of monopoly is higher prices and less output than in a competitive market.
We consider how governments can be the cause of monopolies when we understand the market conditions that give rise to a monopoly.
A monopoly is when a single seller dominates the market for a particular good or service.
There are two conditions that allow a single seller to become a monopolist.
The firm needs to have something unique to sell.
Potential competitors must be prevented from entering the market.
There are many different reasons for monopolies.
Natural gas, water, and electricity are examples of monopolies that occur naturally because of economies of scale.
When the government regulates the amount of competition, there can be monopolies.
Trash pickup, street vending, rides taxicab, and ferry service are all licensed by local governments.
Many monopolists enjoy long- run economic profits because of high barriers to entry.
There is a market.
There are some barriers in the market.
Problems in raising capital and economies of scale are included.
Control of a resource that is essential in the production process is the best way to limit competition.
It is hard to achieve this barrier to entry.
Other competitors will not be able to find enough of a scarce resource if you control it.
In the early twentieth century, the aluminum company of America made a concerted effort to buy mines around the globe.
The company owned the majority of the world's bauxite within a decade.
ALCOA achieved dominance in the aluminum market through this strategy.
Monopolists are usually very large companies that have grown over time.
It is not likely that a bank or a venture capital company would lend you enough money to start a business that could compete with an established company.
If you wanted to create a new operating system that could compete with Microsoft and Apple, you would need a lot of money.
When the chance of success is high, but the chance of a new company successfully competing against an entrenched monopolist is not high, lenders provide capital for business projects.
It is difficult to raise capital to compete.
economies of scale occur when long run average costs fall as production expands The ability to drive rivals out of business is given by low unit costs and low prices.
Imagine a market for electric power where companies compete to generate electricity and deliver it through their own grids.
In such a market, it would be technically possible to run competing sets of wire to every home and business in the community, but the cost of installation and the maintenance of separate lines to deliver electricity would be both prohibitive and impractical.
Smaller electric companies would have to pay to deliver power through their own grid even if they could produce electricity at the same cost.
The system would be very inefficient.
Production costs per unit continue to fall in an industry that enjoys large economies of scale.
Smaller rivals have higher average costs that prevent them from competing with the larger company.
Firms in the industry tend to combine over time.
The creation of a monopoly can be either intentional or a result of a government policy.
Statutes and regulations enforced by the government limit the scope of competition by creating barriers to entry.
It makes sense to give a single firm the exclusive right to sell something.
Licensing requirements can sometimes be used to establish near monopolies to minimize negative externalities.
Some communities license their trash collection to a single company.
The rationale usually involves economies of scale, but there are other factors to consider.
Understanding Monopoly limited leaves consumers with a one- size-fits- all level of service.
In a competitive market, there would be many different types of service at different price points.
Licensing can also lead to corruption.
In many parts of the world, it is common for companies to be bribed in order to get licenses.
Patents and copyrights are areas in which the government fosters monopoly.
Musicians earn royalties over the life of the copyright when they create a new song.
The government guarantees that no one else can play or sell the work without the artist's permission.
When a pharmaceutical company develops a new drug, it gets a patent that gives it the exclusive right to market and sell the drug for as long as the patent is in force.
The gov ernment creates monopolies by granting patents.
Musicians devote their time to writing new music as a result of pharmaceutical companies investing heavily in developing new drugs.
These activities make our society a better place.
Rivals can mimic the invention after the patent or copyright expires.
There are two benefits to this new competition: it opens up the market and it gives consumers more choices in the long run.
Sometimes the right to charge consumers is more important than the right to exposure.
Exposure to a video on the internet can cause people to buy the original artist's work.
If a music studio had tightly controlled his sound while he was an emerging artist, he might not have been able to leverage his YouTube fame into a successful album launch, concert tours, and appearance fees.
Taylor Swift doesn't allow her music on the service because she feels the service doesn't properly compensate her and all the other people involved in creating the music.
Artists have the right to decide how to distribute their work, and what price to charge, thanks to copyright protection.
They have the ability to fight when their work is stolen, illegally downloaded, or improper used.
Government created barriers have the same effect as market created barriers.
The key characteristics of monopolies are summarized in the table.
In the next section, we look at how the monopolist determines the price it charges and how much to produce.
Zocor was the first statin drug to treat high cholesterol.
The company spent millions of dollars to bring the drug to market.
Millions of lives have been saved or extended by Zocor.
Before the patent ran out, it generated over $4 billion in annual revenues for the company.
The generic version of Zocor is 80% to 90% cheaper than the original patent- protected price.
After the patent expired, many customers continued to ask for Zocor, so brand recognition and customer loyalty are another entry barrier.
If other companies could copy the drug, the cost of developing a cholesterol treatment would not be worth it.
Monopolists and firms in a competitive market want to make money.
A monopolist holds market power and is the sole provider of a product.
Monopolists are price makers.
In Chapter 9 you learned about a firm that charges more than it costs.
The demand curve for the product of a firm in a competitive market is horizontal.
Individual firms have no control over what they charge.
To test your understanding of the conditions needed for monopoly power to arise, here are three questions.
He is a basketball player.
He can do things that other players can't.
There are replacements for him around the league.
No, the man is not a monopolist.
Younger players are always entering the league and trying to establish themselves as the best, so his near- monopoly power is limited.
The local hairdresser has a lot of power because the nearest competitor is in the next town.
The town's size limits potential competitors from entering the market because the small community may not be able to support two hairdressers.
Once one hairdresser is in place, a potential rival looks at the size of the market in the small town, calculates how many people he or she could expect to serve, and deduces that the potential revenue is too small to justify entrance into this market.
Barnes & Noble is the nearest retail rival to Amazon, with sales that dwarf them.
In 2015, Walmart's market value was less than that of Amazon.
Amazon's market share does not make it a monopolist.
It is still facing intense competition.
Each firm in the market can sell its entire output without lowering the price because it is a small part of the market.
Because a monopolist is the sole provider in the industry, the demand curve for its product is shown in panel b.
The monopolist's ability to make a profit is limited by the downward sloping demand curve.
The monopolist wants to charge a high price to many customers.
The law of demand shows a negative relationship between price and quantity demanded.
The downward sloping demand curve of the monopolist is different from the horizontal demand curve of a firm in a competitive market.
In this 1994 movie, Tom Hanks's character, Forrest, keeps his promise to his friend, who died in the army, to go into the shrimping business.
Shrimping was easy after that.
Everyone would do shrimping if it were easy.
They got what they got.
We have a lot of boats.
Forrest was able to enter the busi hats that said "Bubba- Gump" on them.
To be sure, he's a shrimp.
Forrest's short- run profits will disappear if you're telling me that the competitors' boats returned.
We got more money than he did, with low barriers to entry.
I heard some whoppers in my time, profits exist, new entrants will expand the supply pro, but that tops them all.
The profits will return to the break-even level.
The film suggests that Forrest could get a permanent monopoly.
Firms in a competitive market face a horizontal demand curve.
The monopolist gets to search for the profit- maximizing price and output because the perfectly competitive firm has no control over the price it charges.
A monopolist will choose a lower price when market demand is more elastic.
Monopolists must find a way to maximize price and output.
A firm can sell all of its produce at the market price.
The downward- sloping demand curve makes it necessary for a monopolist to search for the most profitable price.
A monopolist can use the profit- maximizing rule to maximize profits.
The table shows the revenue of a cable company.
As the price goes down, the quantity of customers goes up.
The total revenue is calculated by taking the output and dividing it by the price.
As the price goes down, total revenue goes up.
The revenue starts to fall when the price is too low.
There is positive marginal revenue associated with prices between $100 and $50.
The marginal revenue becomes negative if it is below $50.
The trade off that a monopolist encounters in trying to attract additional customers is reflected in the change in total revenue.
The firm needs to lower its price to get more sales.
Both new and existing customers can take advantage of the lower price.
The impact on total revenue is dependent on how many new customers buy the good.
The two effects that determine marginal revenue are shown in Figure 10.2.
If the price of service drops from $70 to $60, each of the 3,000 existing customers saves $10, and the firm loses $10, represented by the red area on the graph.
1,000 new customers buying the product when the price drops to $60 increases revenue by $60.
The price effect is less than the output effect.
The result is $30,000 in marginal revenue at an output level between 3,000 and 4,000 customers, if we subtract the $30,000 in lost revenue from the $60,000 in revenue gained.
The revenue gains created by the output effect are always subtracted from the lost revenues associated with the price effect.
Let's look at the data at the individual level.
The marginal revenue per customer is $30 because the firm adds 1,000 new customers.
The marginal revenue is less than the price.
The marginal revenue curve is below the demand curve because of the price effect.
The price effect is small when demand is elastic.
Demand becomes more inelastic as the price goes down.
The price effect increases as the output effect decreases.
It becomes harder for the firm to acquire new customers as the price falls.
The price effect becomes larger than the output effect.
There are two effects of a price drop.
The firm's marginal revenue is negative once the price becomes too low.
The profit- maximizing rule was explored in Chapter 9.
The rule applies to a monopolist as well.
A monopolist does not charge a price equal to marginal revenue.
The profit- maximizing decision- making process is shown in Figure 10.3.
MR is the point at which the firm will maximize its profits.
Determine the profit- maximizing output by setting the price from the point at which MR is MC.
The profit- maximizing rule is used by the firm.
The ideal output level is determined by this condition.
The firm makes a profit when the price is higher than the average total cost curve because of the demand curve.
Until it intersects with the demand curve, it produces less than the efficient level of output.
The monopolist's price is greater than MC.
The monopolist's profit can be determined using this process.
Find the average total cost for making Q units along the vertical dashed line.
Move until you reach the y axis.
The point tells us the average cost of making Q units.
The profit or loss is determined by the difference between the price and average total cost.
There is a way to earn positive economic profits when the ATC curve dips below the D curve.
The firm makes a profit because the price is higher than the average cost.
The vet will serve 1,000 customers if he chooses the point where MR is MC.
Because the average cost is $35 and the price is $50, the total profits are 1,000.
There are differences between a monopoly and a competitive market.
The price established in the market must be taken by the competitive firm.
It can't make an economic profit in the long run.
The monopolist is very different.
The monopolist may be able to make long- run profits by limiting output.
It has market power and is inefficient from a society's perspective.
Many markets in the United States have only one high- speed Internet provider.
The technology race favors cable over telephone lines.
Telephone companies use old copper wiring while cable companies use the latest technology.
Barriers to entry benefit cable companies when it comes to high- speed Internet access.
In a lot of places, the Internet is effectively owned by Comcast and it can price its service accordingly.
Consumers and businesses are affected by the cable monopoly on high- speed internet access.
Consumers need more bandwidth to watch movies and view rich web sites.
A slow connection can make it hard to use the internet.
Consumer demand is very elastic.
Businesses rely on bandwidth to provide services.
Access to a relatively affordable broadband Internet connection is important to companies such as Netflix, Amazon Prime, and Hulu Plus.
Businesses have high demand that is inelastic.
It is argued that relatively inexpensive access to the Internet is crucial if it is to continue as an engine of economic growth.
Access will remain expensive if there is no competition.
Our dependence on the internet raises a bigger question.
There is only one Internet provider in metropolitan areas.
Small rural communities may not have internet access at all.
More than 25 million people in rural areas are off the grid.
The cable companies wouldn't make enough money to connect these areas, making it more difficult for residents to participate in the economy.
A monopolist always earns economic profit.
A monopolist has considerable market power.
The situation usually leads to a positive economic profit.
Monopolists do not operate in competitive markets because they are protected from additional competition that would drive their profit to zero.
There is no reason to think that would happen.
In a market that is insulated from competitive pressures, monopolists sell unique products.
Barriers that limit the entry of competitors into the market are what a monopolist benefits from.
This outcome is not guaranteed.
The demand for the product they sell is not controlled by monopolies.
The monopolist can experience either a profit or a loss in the short run.
Monopolies can affect society by limiting output and charging higher prices.
We will resources in a market once we have looked at the problems with monopoly.
Monopolies result in an inefficient level of output, provide less choice to consumers, and encourage monopoly firms to lobby for government protection.
Let's look at the concerns.
The monopolist charges too much and produces too little.
Imagine a competitive fishing industry in which each boat catches a small portion of the fish.
Each firm must charge the market price.
Panel (b) depicts pricing and output decisions for a monopoly fishing industry when it faces the same cost structure as presented in panel (a).
The supply curve becomes the monopolist's marginal cost curve when a single firm controls the entire fishing ground.