ITM 207 Lecture Notes - Lecture 4: W. M. Keck Observatory, Market Power, Oligopoly
9 May 2018
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Chapter 11
Monopoly:
- Characteristics of monopoly:
o Single seller:
▪ A sole producer of a specific good or the sole supplier of a service
o No close substitutes:
▪ Unique product in that there are no close substitutes
o Price maker:
▪ Controls the total quantity supplied and thus has considerable control
over price
▪ The monopolist confronts the usual downsloping product demand curve
▪ It can change its product price by changing the quantity of the product it
produces
o Blocked entry:
▪ Strong barriers to entry block potential competition
▪ Those barriers may be economic, technological, legal, or of some other
type is totally blocked in monopoly
o Non-price competition:
▪ The product produced by a monopolist may be either standardized (as
with natural gas and electricity) or differetiated as ith Mirosoft’s
windows software or Frisbees)
▪ Monopolists that have standardized products engage mainly in public
relations advertising, whereas those with differentiated products
soeties adertise their produts’ attriutes
- Examples of monopoly:
o Public utilities companies:
▪ Natural gas
▪ Electric
▪ Water
▪ Toronto Hydro is the sole supplier of electricity in the urban market of
Toronto
o Near monopolies:
▪ Many near-monopolies also exist in which a single firm has the bulk of
sales in a specific market
▪ EX. Intel, for example, produces 80% of the central microprocessors used
in personal computers
▪ Wham-O:
• Sells 90% of plastic throwing disks
o Professional sports teams:
▪ Monopolies because they are the sole suppliers of a specific service in
large geographic areas
▪ If you want to see a live MLB game in Toronto, you must patronize the
Blue Jays
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▪ A small town may be served by only one airline, railroad, a local
barbershop, dry cleaner, or grocery store may approximate a monopoly
▪ In the skies above, airlines control the only internet access that is
available to the passengers flying their planes
- Barriers to entry:
o The factors that keeps firms from entering an industry:
▪ In monopoly, strong barriers to entry effectively block all potential
competition
▪ Somewhat weaker barriers may permit oligopoly, a market structure
dominated by a few firms
▪ The absence of any effective entry barriers permits the entry of a very
large number of firms, which provides the basis of perfect competition
▪ Economies of scale:
• Modern technology in some industries is such that economies of
scale – declining ATC with added firm size – are extensive
• I suh ases, a fir’s log-run average-cost schedule will decline
over a wide range of output
• Given market demand, only a few large firms, or, in the extreme,
only a single large firm can achieve low average total costs
• When long-run average total cost (ATC) is declining, only a single
producer, a monopolist, can produce any amount of output at
minimum total cost
• If a monopoly exists in such an industry, economies of scale will
serve as an entry barrier and will protect the monopolist from
competition
• New firms that try to enter the industry as small-scale producers
cannot realize the cost economies of the monopolist and
therefore cannot obtain the normal profits necessary for survival
or growth
• A new firm might try to enter the industry as a large-scale
producer so as to achieve the necessary economies of scale
o But the massive expense of the plant facilities along with
customer loyalty to the existing product would make the
entry highly risky
• A monopoly firm is referred to as a natural monopoly if the
market demand curve intersects the long-run ATC curve at any
point where ATC are declining
• A monopolist may, instead, set its price far above ATC and obtain
substantial economic profit
o In that event, the cost advantage of a natural monopolistic
would accrue to the monopolist as profit and not as lower
prices to consumers
▪ Legal barriers: Patent and licenses:
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• Patents:
o Is the exclusive right of an inventor to use, or to allow
another to use, his or her invention
o Patent laws protect the inventor from rivals who would
use the invention without having shared in the effort and
expense of developing it
o Patents thus provide the inventor with a monopoly
position for the life of the patent
o Firms that gain monopoly power through their own
research or by purchasing the patents of others can use
patents to strengthen their market position
o The profits from one patent can finance the research
required to develop new patentable products
o In the pharmaceutical industry, patents on prescription
drugs have produced large monopoly profits that have
helped finance the discovery of new patentable medicines
• Licenses:
o The government may also limit entry to an industry or
occupation through licensing
o In many large cities, one of a limited number of municipal
licenses is required to drive a taxicab
o The restriction of the supply of cabs creates economic
profit for cab owners and drivers
o New cabs cannot enter the industry to force prices and
profit lower
▪ Ownership of essential resources:
• A monopolist can use private property as an obstacle to potential
rivals
• EX. A firm that owns or controls a resource essential to the
production process can prohibit the entry of rival firms
▪ Pricing:
• Even if a firm is not protected from entry, by, say, extensive
economies of scale or ownership of essential resources, entry may
be effectively blocked by the way the monopolist responds when
rivals attempt to enter the industry
• Confronted with a new entrant, the monopolist may create an
entry barrier by slashing prices, stepping up advertising, or talking
about strategic action to make it difficult for the entrant to
succeed
- Monopoly demand:
o Eooies of sale, patets, or resoure oership seure the oopolist’s
status
o Government does not regulate the firm
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Document Summary
Examples of monopoly: public utilities companies, natural gas, electric, water, toronto hydro is the sole supplier of electricity in the urban market of. Toronto: near monopolies, many near-monopolies also exist in which a single firm has the bulk of sales in a specific market, ex. Intel, for example, produces 80% of the central microprocessors used in personal computers: wham-o, sells 90% of plastic throwing disks, professional sports teams, monopolies because they are the sole suppliers of a specific service in large geographic areas. If you want to see a live mlb game in toronto, you must patronize the. Blue jays: a small town may be served by only one airline, railroad, a local barbershop, dry cleaner, or grocery store may approximate a monopoly. In the skies above, airlines control the only internet access that is available to the passengers flying their planes. Barriers to entry: the factors that keeps firms from entering an industry:
