Monopolies

Monopoly  Characteristics  1. A single producer - only producer of good or service  2. No close substitutes – if consumer does not buy monopolized product they must do without it  3. Barriers to entry/exit: no competitors because of certain barriers that keep potential competitors from entering industry  4. Specialized information- information isn’t shared between buyers and sellers, patents, secret formula, unique production method etc.

Monopoly  Examples of monopoly  In most cities government owned or government regulated public utilities such as natural gas, water, cable, telephone companies  Many near monopolies in which single firm has the bulk of sales in specific market  Intel provides 80% of central microprocessors used in PC  Wham – O sells 90% of plastic throwing disks (Frisbees)  Professional sports teams are in a sense monopolies because they are the sole suppliers of specific services in large geographic areas

Monopoly  Why are there no pure monopolies?  Sherman Anti Trust Act of 1890  It was the first Federal statute to limit cartels and monopolies  Requires the US federal government to investigate and pursue trust, companies, and organizations suspected of violating the Act.  Clayton Anti Trust Act of 1914  Added further regulations to the Sherman Anti Trust law buy seeking to prevent anti competitive practices

Monopoly  Barriers to Entry  Legal barriers: one firm is given the right to sell  Licenses: government limits entry into an industry or occupation through licensing.  The FCC licenses only so many radio and tv stations in each geographic area

Monopoly  Barriers to Entry Cont’d  Patents: exclusive right of an inventor to use, or allow another to use the invention  Aim to protect inventor from rivals who would use the invention without having shared in the effort or expense in developing the invention  At same time patents provide the inventor with a monopoly position for the life of the patent  Firms gain monopoly power through their own research or by purchasing the patents of others to strengthen their market position  Pharmaceutical industry

Monopoly  Barriers to Entry Cont’d  Economies of scale: declining average total cost with added firm size  Given market demand only a few large firms or a single firms can achieve low ATC  New firms that try to enter the industry as small scale producers cannot achieve the cost of the monopolist therefore cannot obtain profits or survive  Ex: automobiles, commercial aircraft and basic steel

Monopoly  Barriers to Entry Cont’d  Control of key resources: firm controls most of the available resources in the production of the good, so difficult for competitor to enter market.  Ex: own all the land that has oil, can monopolize on that

Monopoly  Demand Curve for monopoly = Demand of the market  Supply curve for market = supply curve of monopoly = MC curve  Marginal Revenue curve is downward sloping and below Demand Curve  Profit Maximizing Quantity where MR=MC  Profit Maximizing Price – use profit maximizing quantity and demand curve

Monopoly  Draw Monopoly

Monopoly  Profit: P – ATC  Monopolies will have positive profits in the short run and long run

Monopoly  Social Welfare  Consumer and producer surplus  Are monopolies productively efficient?  Are they producing at their lowest ATC?  No  Are monopolies allocativly efficient?  No supply does not equal the demand  Efficiency is when P=MC but monopolies charge a higher price then MC. P>MC

Recall…  Draw Perfect competition market and firm graphs in LR equilibrium  Are perfectly competitive firms allocatively efficient?  Yes!  Are perfectly competitive firms productively efficient in Long run  Yes!