Monopoly

8 Key excerpts on "Monopoly"

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  eBook - ePub

  Microeconomic Theory second edition

  Concepts and Connections

  • Michael E. Wetzstein(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  13 , we consider the market structure of Monopoly behavior. Monopoly is the polar case to perfect competition. In a Monopoly market, there is a single firm producing a product for which there are no close substitutes. The firm is the industry and thus faces the market demand curve for its price and output decisions. Given the downward-sloping market demand curve, the Monopoly has control over the price it receives for its output. For example, if the Monopoly reduced its output, the price per unit it would receive for its output would increase.

  Monopolies do exist in reality; for example, within a local community, electric, gas,and water companies are generally each a Monopoly. Firms with few close substitutes— such as an athletic association offering tickets to a major sporting event, an ice-cream stand on a beach, and a gasoline station on a remote road—can also behave like monopolies. Such firms are said to have some degree of Monopoly power, defined as the ability to set price above marginal cost. The degree of Monopoly power depends on the ability of a firm to profitably set its price above the perfectly competitive price. The fewer the number of close substitutes, the closer a firm is to being a true Monopoly. Thus, for a Monopoly, the demand for the product must be reasonably independent of the price of other products. Specifically, the cross-price elasticity of demand

  which measures the relative responsiveness in the demand for the Monopoly product j to changes in the price of commodity i , must be

  where α is some arbitrarily small positive number.

  Monopoly power. A firm's ability to set price above marginal cost. E.g., a winery's ability to set a price for its award-wining wine above the marginal cost of production.

  Application: Monopoly power and the United States Post Office

  Only the Post Office is allowed to deliver first-class mail, resulting in a Monopoly in existence since the founding of the country. The Post Office has always insisted that it requires this protection for maintaining a national service that reaches every American at the same price. However, this Post Office Monopoly on delivering letters will likely fade away. The former Postmaster General Marvin Runyon anticipates a world, by 2020, in which paper mail and electronic mail blend together and the Postal Service is a much more automated operation.Through the natural forces of the marketplace, the Monopoly power of the Post Office will vanish. By the year 2020, there will be so many ways to communicate, advertise, and ship merchandise that the Monopoly power of the Post Office will vanish due to natural market forces. Already, electronic mail is a major factor in communications. For example, it costs over 50 cents to deliver a Social Security check by “snail mail” and just 2 cents electronically.The economics are just too compelling not to drive a change. By 2020, it is likely that millions of Americans will be working at home in virtual companies and small home-based businesses. The Postal Service will have to support this working environment by providing the full array of postal services electronically. However, United Parcel Service, Federal Express, and other carriers will be offering these same or similar services.

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  Antitrust Policy

  The Case for Repeal

  • D.T. Armentano(Author)
  • 1986(Publication Date)
  • Cato Institute

    (Publisher)

  Competition and Monopoly: Theory and Evidence Much of the support for antitrust policy depends upon the correctness of the standard theories of competition and Monopoly. These can be briefly summarized as follows.

  The Theories

  Some economists define "competition" as a state of affairs in which rival sellers of some homogeneous product are so small— relative to the total market supply—that they individually have no control over the market price of the product.

  1

  These atomistic sellers take the market price as given and then attempt to generate an output that maximizes their own profit. The final outcome (equilibrium) of such a market organization of firms is that consumers obtain the product at the lowest possible cost and price. Such markets are said to be "purely" competitive ("perfectly" competitive if there is perfect information), and resources are said to be allocated efficiently.

  Free-market Monopoly involves some voluntary restriction of market output relative to the output forthcoming under competitive conditions. Economists usually assume that "Monopoly" means that there is only one supplier of a product with no reasonable substitutes or that several major suppliers of a product collude to restrict production. The economic effect of such monopolization is that market outputs are restricted—the Monopoly "restrains" trade— and prices are increased to consumers. Such restrictions of production are also said to misallocate resources and reduce social welfare.

  The expression "misallocation of resources" is a powerful one in economics. It signifies that scarce economic resources are not being put to their greatest economic advantage. The implication is that some alternative allocation of these resources could improve overall economic performance.

  Monopoly is said to misallocate resources in two fundamental ways. The first is termed "allocative inefficiency." It implies that the price consumers pay for a product under Monopoly—the Monopoly price—exceeds the marginal cost of producing that product. Consumers indicate their willingness to have suppliers produce more of some product by paying a price that exceeds the marginal cost of producing it. Firms with Monopoly power, however, can maximize their profits by restricting their production and keeping their prices up. Suppliers with Monopoly power are said to have no incentive to expand production to the point where market price and marginal cost are equal. The consequence of such supply decisions is that resources are at least somewhat misallocated and social welfare is reduced.

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  Markets and Power

  The 21st Century Command Economy

  • Eric A. Schutz(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  In principle a Monopoly may also use its power to exploit by means of a more explicit command over people as well, that is, by means of specific commands or instructions given to customers that the latter must obey if they are to have access to the Monopoly’s commodity. Competitive retailers of a monopolist’s product, for example, may be compelled to package or display the product not as they choose but as the monopolist chooses; wholesalers may even be restricted in whom they may sell the monopolist’s product to. Firms taking what amounts to a managerial role in other firms with which they do business may be even more common in cases of monopsony, where, for example, a firm may even place some of its own managers in a position of overseeing the daily operations of subordinate parts or materials suppliers (I will discuss such cases further in the next chapter). Just how important is this kind of power structure in reality? The basic model of Monopoly holds a solid place in traditional economic theory from Adam Smith onward, but its bearing upon the real world has been subjected to an especially heated criticism from the recently ascendent right-wing of mainstream economics. One important concern raised in that criticism is that Monopoly per se is rare in reality: aside from the rest of what appear to be quite competitive industries, the only markets that are even close to being monopolistic are cases either of oligopoly or of a dominant firm among other competing smaller firms. In both such cases, firms are arguably involved in competitive situations with other firms, and few opportunities for exercising power can exist: If any one firm attempts to exert Monopoly power, customers may take their business to other firms

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  eBook - ePub

  Principles of Microeconomics

  • Peter Curwen, Peter Else(Authors)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  In cases where long-run marginal cost curves don’t eventually rise, price taking, profit-maximizing firms will seek to expand their output more or less indefinitely in the long run. But if a number of firms attempt to do that (and all firms in an industry are likely to face similar technical conditions), the price at which output can be sold will fall and less efficient firms will be forced out of the industry. Then, as the number of firms falls, each surviving firm may become large enough, in relation to the industry as a whole, for its output decisions to start to have some effect on market price. In other words, they become price makers rather than price takers and competition is no longer perfect in the strict sense. Moreover, in extreme cases, the number of firms in an industry can be reduced to one, and that is the situation we consider next.

  Monopoly

  A Monopoly exists in theory where a firm is the only supplier of a good or service for which there are no direct substitutes. Whilst potential entry may not be ruled out in principle, it does not take place in practice because a Monopoly is protected by extremely effective barriers to entry. Thus a Monopoly can be regarded as the other extreme case in the spectrum of market structures.

  A Monopoly may arise as a result of natural forces, or it may be artificially created. By a natural Monopoly we mean a situation in which there are such extensive economies of scale involved in the supply of a commodity that duplication of the entire supply system would be hopelessly uneconomic. The classic examples of this situation are the public utilities, all of which either are, or were, nationalized in the UK. Thus more than one electricity grid, or gas pipe network, or rail network would be expected to raise costs much more than revenue. Notice, however, that the same argument cannot be applied to every individual part of the supply system as is commonly supposed. Whilst it is only sensible to have a single gas main running down each road, there is no reason why the gas itself cannot be stored in a large number of competing plants, which obtain it from competing gas suppliers, and fed into the network at a price to be negotiated between the supplier of the gas and the owner of the network Monopoly.

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  Principles of Agricultural Economics

  • Andrew Barkley, Paul W. Barkley(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  When there are only a few firms in an industry, individual firms may be able to charge a price higher than the competitive price, forcing consumers to pay more than the product’s cost of production. Since this outcome is inefficient, the US government has legislated against the blatant use of market power. In 1890, the United States passed the Sherman Antitrust Act (1890) to protect consumers from firms that used excessive amounts of market power to influence the prices charged for their products. Giant firms like Standard Oil and the American Tobacco Company were among the first to be regulated by the antitrust laws. Why? Because they used their immense market power to set prices of their products at a level above the cost of production. They, and others, made huge profits from their price-setting activities. Since these practices placed a heavy burden on individual consumers and other sectors of the economy, the government took steps to limit the price-setting abilities of monopolistic firms.

  13.2 Monopoly

  A Monopoly is easy to define and understand because the entire industry is a single firm. No other firm produces the same or similar goods.

  • Monopoly = a market structure characterized by a single seller. The firm is the industry.

  Quick Quiz 13.1

  Is McDonald’s a Monopoly, since it is the only firm that produces and sells a Big Mac?

  While it is true that McDonald’s is the only firm that sells the Big Mac, McDonald’s is not a monopolist, since many firms produce hamburgers, many of which are close substitutes for Big Macs. A Monopoly is the only producer of a good that has no close substitutes. In a Monopoly, the firm is the industry. Since the monopolist is not subject to competition, the monopolist is a Price Maker , instead of a Price Taker .

  • Price Maker = a firm characterized by market power, or the ability to influence the output price. A firm facing a downward-sloping demand curve.
  • Price Taker = a firm so small relative to the industry that the price of its output is fixed and given, no matter how large or how small the quantity of output it sells.

  A Monopoly has characteristics that differ from those of a competitive firm. These two types of market structure are on opposite ends of a spectrum (recall Table 12.1 ). Table 13.1

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  eBook - ePub

  Principles of Agricultural Economics

  • Andrew Barkley, Paul W. Barkley(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  When there are only a few firms in an industry, individual firms may be able to charge a price higher than the competitive price, forcing consumers to pay more than the product’s cost of production. Since this outcome is inefficient, the US government has legislated against the blatant use of market power. In 1890, the United States passed the Sherman Antitrust Act (1890) to protect consumers from firms that used excessive amounts of market power to influence the prices charged for their products. Giant firms like Standard Oil and the American Tobacco Company were among the first to be regulated by the antitrust laws. Why? Because they used their immense market power to set prices of their products at a level above the cost of production. They, and others, made huge profits from their price-setting activities. Since these practices placed a heavy burden on individual consumers and other sectors of the economy, the government took steps to limit the price-setting abilities of monopolistic firms.

  13.2 Monopoly

  A Monopoly is easy to define and understand because the entire industry is a single firm. No other firm produces the same or similar goods.

  • •
    Monopoly =
    a market structure characterized by a single seller. The firm is the industry.

  QUICK QUIZ 13.1 Is McDonald’s a Monopoly, since it is the only firm that produces and sells a Big Mac?

  While it is true that McDonald’s is the only firm that sells the Big Mac, McDonald’s is not a monopolist, since many firms produce hamburgers, many of which are close substitutes for Big Macs. A Monopoly is the only producer of a good that has no close substitutes. In a Monopoly, the firm is the industry. Since the monopolist is not subject to competition, the monopolist is a price maker , instead of a price taker . These terms were discussed in Chapter 4 . A Monopoly has characteristics that differ from those of a competitive firm. These two types of market structure are on opposite ends of a spectrum (recall Table 12.1 ). Table 13.1 compares the characteristics of the two types of industrial structure.

  Table 13.1 Monopoly and competition

  Monopoly	Competitive firm
  One seller	Numerous sellers
  No close substitutes	Homogeneous product
  Barriers to entry and exit	Freedom of entry and exit
  Unavailability of information	Perfect information

  Table 13.1

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  eBook - ePub

  Essentials of Microeconomics

  • Bonnie Nguyen, Andrew Wait(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  13 Monopoly

  DOI: 10.4324/9781315690339-13

  13.1 Introduction

  In the last chapter, we looked at a market that exhibited the most extreme characteristics of competition. Now we turn to the other end of the spectrum: here we examine markets with only one seller. A market with one seller is a Monopoly, and that seller is a monopolist. In this chapter, we will examine how the market power of a monopolist allows it to charge higher prices in order to increase its profits, and we consider the welfare implications of this market power. We then analyse how the monopolist might use price discrimination to further increase its profits. Finally, we look at the regulation of a natural Monopoly, where it is less costly for the whole market to be serviced by one firm, rather than two or more.

  13.2 Characteristics of a Monopoly

  Monopolies have the following characteristics:

  1. One seller and many buyers. There is a single producer of all output in the market.
  2. Price maker. Because the monopolist is the only firm in the market, it has the market power to determine the price in the market – that is, it is a price maker.
  3. Barriers to entry. Firms that might like to enter the market are prevented from doing so by barriers to entry. Barriers to entry may exist for a number of reasons: the monopolist may have access to a natural resource or technology that is not available to other firms; the monopolist might hold a patent or a copyright that prevents other firms from selling the same product; the government might ban entry by other potential seller; or, the monopolist might simply have a lower cost of production that effectively allows them to prevent other firms from entering the market.

  13.3 The single-price monopolist

  In this section, we examine the behaviour of a monopolist who charges the same price to all of its consumers (also known as a single-price monopolist).

  Because the monopolist is the sole producer, it faces all the demand in the market. In other words, the monopolist faces the downward-sloping market demand curve. However, the monopolist does not itself have a supply curve; recall from Chapter 8 that the supply curve applies only to competitive firms, as a supply curve is derived assuming a firm is a price taker.1

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  eBook - ePub

  The Economic Approach to Law, Third Edition

  • Thomas J. Miceli(Author)
  • 2017(Publication Date)
  • Stanford Economics and Finance

    (Publisher)

  The literature on antitrust is vast, so this chapter offers only an overview of some of the key issues, with an emphasis on the insights economic theory can offer. We begin with a review of the economics of perfect competition, which provides a benchmark for measuring the efficiency losses due to Monopoly. We then turn to the role of the law in promoting competition.

  1    Perfect Competition Versus Monopoly

  A Monopoly is defined to be a market that is served by a single seller. The problem of Monopoly, and the economic justification for legal intervention to prevent it, is that monopolistic firms set a price and output level that are inefficient, resulting in a loss of welfare. The nature of this loss is best seen in relation to a perfectly competitive market, which, because it allocates resources efficiently, maximizes social welfare.

  1.1    Competitive Markets and Welfare

  The defining characteristic of a competitive market is the large number of firms, which makes it impossible for any one firm to affect the market price. For this reason, we say that firms are price takers . Figure 10.1 illustrates the determination of equilibrium price and quantity in a competitive market. The left panel shows the market output and price, which is determined by the intersection of the supply and demand curves. At this point, the amount of the good that consumers want to buy at the market price exactly equals the aggregate amount that producers supply to the market. The right panel of Figure 10.1 shows the corresponding output of an individual firm, q *, which occurs where the equilibrium price of the good (the firm’s marginal revenue, which it takes as given), equals its marginal cost, or where P * = MC .1

  The outcome depicted in Figure 10.1

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