Chapter 22

Name the Monopolist John D Rockefeller Standard Oil JP Morgan US Steel Bill Gates Microsoft Alexander Graham Bell Bell Telephone

Monopoly the other extreme of The “Big 4”Market Structures Perfect Competition:  Many Sellers  Identical Products  Entry in to market (and leaving) is easy  No Market power Monopoly:  A firm with lone seller of a product with no close substitutes  No subs because product or service is “unique and/or non- reproducible”  Barriers exist for entry into the market  Total Market Power! (Price setter)

Moving Toward Monopoly  As the lone or dominant seller of a product or service, a monopoly is in a good position to earn economic profit. All businesses dream of monopoly power…  Finding a “Competitive Advantage”  “Cornering the market”  Having a “benchmark” product – I-Phone  Firms today that are dominant…  Google, Facebook, Netflicks, Intel, Sirius XM Radio, Microsoft

Monopolistic factors: Barriers to Market Entry Barriers to entry – In order for a firm to maintain its monopolistic position there must be “forces” that block the entry of new firms into the market. There are 3 general types of barriers. #1 - Legal Barriers Public Franchise – The government grants one firm an exclusive right to provide a good or service to a market. Example - NPD (Nebraska Power District). NPD is subject to government regulations as a public franchise. These are often natural monopolies….companies that operate on huge economies of scale and require huge capital

More Legal Barriers Patents – A government granted monopoly on the production and sale of an invention granted to the inventor. Most patents are for 20 years. Many pharmaceuticals are 7 years A. Patents are incentive to create and innovate B. Patents are payback for research and development costs C. Examples: Stephanie Kwolek (DuPont – Kevlar) Eli Lilly (Prozac) Stock dropped by 1/3 when patent ran out

More Legal Barriers Copyrights – A copyright is a government granted monopoly on the production and sale of a creative work granted to the creator. Most copyrights are for the life of the author plus 70 years.  This monopoly position is a reward for creative behavior Question: Who the 10 wealthiest dead celebrities?

Top 10 Dead Celebrities  #10 – Bruce Lee  #9 – Albert Einstein  #8 – Theodore Geisel  #7 – John Lennon  #6 – Marilyn Monroe  #5 – Bob Marley  #4 – Elizabeth Taylor  #3 – Charles Shultz  #2 – Elvis Presley  #1 – Michael Jackson

More Legal Barriers License – A license is a permit issued by the government authorizing a person to conduct a certain type of business. Entry into the market depends upon obtaining a license.  Cable Television Networks (2 per region?)  Cell Phone Companies (Bandwidth)  Television and Radio Stations (FCC)  NYC Cabs (13,000 by city regulation)

More Legal Barriers Trade Restrictions – These are government imposed limitations on international trade using tariffs and quotas.  Policy of “Protectionism” – farming, oil, textiles, autos

#2 - Economies of Scale Economies of scale exist when, as the scale of production is increased, average costs of production decrease. Huge fixed costs up front…but as production increases total costs drop. Nuclear Power Plants Natural Monopoly – when extreme economies of scale exist (water, power, NASA)

#3 Exclusive ownership of an essential resource  Alcoa – Early in the century, Alcoa owned or controlled most of the bauxite in the US. Bauxite is the chief ore of commercial grade aluminum.  This is very rare!

The Problems with Monopolies “Rent Seeking” – when people use resources to manipulate public policy in order to redistribute income to themselves from others (lobbying, campaign contributions, public relations efforts) Very socially wasteful because it results in a deadweight loss. (page 22- 7) 1. uth-park-rent-seeking-competition uth-park-rent-seeking-competition 2. Rent Seeking makes firms less responsive to consumer demand – consumers want our producers to be very responsive 3. Rent Seeing makes firms less diligent to minimize costs of production – keeping production costs down keep prices down

More Problems with Monopolies Price Discrimination – occurs when a seller charges different prices to different types of buyers for the same good. Problem: I don’t like these prices because they are too high! There are two types of people in this situation…the less cost-conscious and the more cost-conscious  Coupons or discounts: for the cost-conscious they will take time clip coupons or seek discount codes.  Negotiating: Monopolies start high and end lower. Cost-conscious will negotiate further than non.

Test Questions Chapter 19  Fill in: 1-8  MC: 1-4, 6-17  Problems: 1-4 Chapter 21  Fill in: 1-5  MC: 1-4,  Problems: (none) Chapter 22  Fill in: 1-9  MC: 1-3, 11,  Problems: 1