Chapter 7 Section 2Monopolies

Sydney Hall

A monopoly occurs when a market is dominated by a single seller. They form when barriers prevent other firms form entering a market that has a single supplier.

What is a monopoly?

Example: A prescription medicine you buy costs $100 a month because only one company has the rights to produce that medicine.

Economies of scale- factors that cause a producer’s average cost per unit to fall as output rises

Forming Monopolies

An industry in a market with economies of scale has the potential to supply the entire market on it’s own without raising costs to produce goods.

Example: A hydroelectric plant

Without Economies of Scale

With Economies of Scale

Natural monopoly- a market that runs most efficiently when one large firm supplies all of the output

Forming Monopolies

A second firm entering the same market would drive down the price of the product and could force one or both companies to go out of business.

Example: Public water supply

Government monopolies form when governments input barriers and take action in the markets to make monopolies.

Patent- a license that gives the inventor of a new product the exclusive right to sell it for a certain period of time (granted by the Gov.)

Government Monopolies

◦ Patents guarantee profit without competition, which encourages the research and development of products that benefit society.

Franchise- a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market◦ Used to keep small markets under control◦ Example: fully-operating restaurants in schools

License- a government-issued right to operate a business◦ Examples: radio and television broadcast

frequencies, public parking lots

Government Monopolies

Mail Service◦ The United States Postal Service delivers people’s

everyday mail, and occasionally packages, to their residencies. Other shipping services, such as UPS and FedEx, can only deliver packages. Having too many companies trying to deliver the same mail to one address would become complicated and messy.

Real World Examples

Monopoly: The Game◦ The goal is to obtain as

many property slots as possible in order to make profits from the other players in the game.

Videohttp://www.youtube.com/watch?v=R851B6afFzc

Law of output- increasing the price of a product will create less demand (less will sell) and vice versa

Monopolist Decisions

◦ Monopolists must calculate the perfect balance between price and demand in order to make a maximum profit

◦ The goal is to have marginal cost (cost of production of one more unit of a good) equal the marginal revenue (additional income for selling one more unit of a good)

Price discrimination- division of customers into groups based on how much they will pay for a good◦ If the price is set too high, only a

handful of customers will buy the product; the monopolist loses profits

◦ Too low, many customers will buy the product, but the monopolist loses money from the potential customers willing to pay more for the good

Market power- the ability of a company to control prices and output like a monopolist◦ Used by companies who are not true

monopolies

Monopolist Decisions

Target discounts- a way for a monopolist to divide consumers in groups and assign different pricing policies to each one◦ A price discrimination strategy; a way to locate

consumers who are willing to pay more/less or those who need the good the most

◦ Examples: discounted airline tickets, special promotions for extended stay, manufacturers’ rebates

Price discrimination is only successful when market power exists, customers are divided into distinct groups, and buyers must not be able to easily resell the good for a profit.

Monopolist Decisions