Microeconomics chapter 8

Gov't intervention from monopoly power resulting in an adverse effect upon the economy

-Antitrust laws Break up the firm (last resort) -Regulate it Government determines price and quantity (ceilings) -Ignore it Let time and markets get rid of monopoly

Price Discrimination

-Charging different buyers different prices -Price differences are not based on cost differences of resources

Monopoly: Single Seller

a sole producer

Monopoly: Price maker

control over price because the firm controls the quantity supplied Since the firm is the industry, they have control over the price that is charged for their good

Pure Monopoly

means that there is only one producer of the good with no close substitutes being produced by any other firms.

Monopoly: Nonprice competition

mostly PR or advertising the product There is very little nonprice competition since there are not any rival firms. There is some nonprice competition that is merely meant to increase the demand for the good.

Monopoly: Blocked entry

strong barriers to entry block potential competition Monopolies are created and sustained due to strong entry barriers that make it very difficult for new firms to enter the industry.

Examples of Barriers to Entry

Economies of scale Legal barriers: patents and licenses Ownership of essential resources (DeBeers, International Nickel of Canada - now Inco.) Pricing (Dentsply, Microsoft)

Misconceptions of Monopoly Pricing

-Not highest price A monopolist cannot charge the highest price it can get because it will maximize profits where total revenue minus total cost is greatest. (people will stop paying it because they only have so much income) This depends on quantity sold as well as on price and will never be the highest price possible. -Total, not unit, profits are the goal of the monopolist unlike in the fashion industry -Possibility of losses There is always the possibility that the monopolist will earn losses. Monopolists are not protected from changes in demand.

Examples of Monopoly

-Public utility companies (most common): Natural gas Electric Water -Near monopolies (so big, like a monopoly): Intel Wham-O (outdoor toys etc) -Professional sports teams: many teams, but only one league

Costs complications: Costs for monopolies may not be the same as for more competitive firms. Following are four reasons why costs may differ:

-economies of scale fostered by a product's ability to satisfy a large number of consumers at the same time. . Economies of scale may result in one or two firms operating in an industry experiencing lower ATC than many competitive firms. These economies of scale may be the result of spreading large initial capital cost over a large number of units of output (natural monopoly) or, more recently, spreading product development costs over units of output, and a greater specialization of inputs. -X-inefficiency may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs. (See next slide for graph.) -rent seeking behavior - gives money to gov't to have gov't take their company into consideration (lobbying) -Technological Advance show little interest in technological progress because no competition to beat in advances

Economic Effects of Monopoly

-they will produce less and charge more because they have no competition so they can to keep from overprodcuing -income distribution is more unequal than it would be under a competitive market because there is a mandatory income transfer from consumer to monopoly company. This will result in a redistribution of income in favor of higher-income business owners, unless the buyers of monopoly products are wealthier than the monopoly owners.

The following analysis of monopoly demand makes three assumptions:

1. The monopoly is secured by patents, economies of scale, or resource ownership. 2. The firm is not regulated by any unit of government. 3. The firm is a single price monopolist; it charges the same price for all units of output.

Examples of Barriers to Entry: Economies of Scale

Ability to produce massively and can produce at lower costs = competitive advantage and eventually take-over *Barnes and Nobles .....constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale. (1) Public utilities are often natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying the entire demand. (2) Government usually gives one firm the right to operate a public utility industry in exchange for government regulation of its power.

Examples of Price Discrimination

Business Travels (inelastic demand) - charge more Tourism (elastic demand) -charge less Movie theaters - matinees cost less for older people and families -Golf Courses -Coupons -International Trade - dumping or selling in other countries to make up for a lack of sales in another country

Market segregation

Market segregation means that you have identified your different buyers and can separate your market based on their willingness to pay.

Examples of Barriers to Entry: Pricing

Monopolists may use pricing or other strategic barriers such as selective price-cutting and advertising. 1. Dentsply, manufacturer of false teeth, controlled about 70 percent of the market. In 2005 Dentsply was found to have illegally prevented distributors from carrying competing brands. 2. Microsoft charged higher prices for its Windows operating system to computer manufacturers featuring Netscape Navigator instead of Microsoft's Internet Explorer. U.S. courts ruled this action illegal.

Monopoly power

Monopoly power means that the firm must have some pricing power. Pricing power is the ability of a firm to set its own price. Therefore we find price discrimination in all types of markets except perfect competition

No resale

No resale means that a low-price buyer is prevented from buying at the low price and reselling the good to a high-price buyer. Otherwise, your price discrimination scheme would break down.

Monopoly Demand

The pure monopolist is the industry The demand curve is the market demand curve Down-sloping demand curve gov't gives monopolies a price ceiling to protect consumers

Barriers to Entry

a factor that keeps firms from entering an industry

Examples of Barriers to Entry: ownership or control of essential resources

is another barrier to entry. (1) International Nickel Co. of Canada (now called Inco) used to control about 90 percent of the world's nickel reserves and De Beers of South Africa controls most of the world's diamond supply. (2) Professional sports leagues control player contracts and leases on major city stadiums.

Examples of Barriers to Entry: Legal Barriers

to entry into a monopolistic industry also exist in the form of patents and licenses. (1) Patents grant the inventor the exclusive right to produce or license a product for 20 years; this exclusive right can earn profits for future research, which results in more patents and monopoly profits. (2) Licenses are another form of entry barrier. Radio and TV stations and taxi companies are examples of government granting licenses where only one or a few firms are allowed to offer the service.

Monopoly: No close substitutes

unique product