Monopoly

Monopoly A monopoly is one business firm that produces the entire market supply of a particular good or service. A monopoly is one business firm that produces the entire market supply of a particular good or service.

Monopoly Profits Total profit equals profit per unit times the number of units produced. Total profit equals profit per unit times the number of units produced.

Monopoly vs. Competitive Industries A monopolist produces less and charges a higher price than a competitive industry. A monopolist produces less and charges a higher price than a competitive industry.

Threat of New Businesses A monopoly attains higher prices and profits by restricting production. A monopoly attains higher prices and profits by restricting production. The threat of new businesses does not affect a monopolist due to high barriers to entry. The threat of new businesses does not affect a monopolist due to high barriers to entry.

Barriers to New Businesses Patent Protection Patent Protection Legal Harassment Legal Harassment Exclusive Licensing Exclusive Licensing Bundled Products Bundled Products Government Franchises Government Franchises

Patent Protection A patent is a government grant of exclusive ownership of an innovation. A patent is a government grant of exclusive ownership of an innovation. A patent is a source of monopoly power. A patent is a source of monopoly power. Polaroid’s patents forced Kodak out of the instant-photography business. Polaroid’s patents forced Kodak out of the instant-photography business.

Legal Harassment Suing potential new businesses can deter entry into an industry. Suing potential new businesses can deter entry into an industry. Lengthy legal battles are so expensive that the threat of legal action may deter entry into a monopolized market. Lengthy legal battles are so expensive that the threat of legal action may deter entry into a monopolized market.

Exclusive Licensing Lack of a license makes it difficult for potential competitors to acquire the factors of production they need. Lack of a license makes it difficult for potential competitors to acquire the factors of production they need.

Bundled Products Forcing consumers to purchase complementary products discourages competition. Forcing consumers to purchase complementary products discourages competition. Bundling products makes it difficult for competitors to sell their products profitably: Bundling products makes it difficult for competitors to sell their products profitably: Microsoft bundles software applications with its Windows operating systems. Microsoft bundles software applications with its Windows operating systems.

Government Franchises A monopoly granted by a government license: A monopoly granted by a government license: These include local power, telephone, and cable TV companies. These include local power, telephone, and cable TV companies. Another example is the U.S. Postal Service in providing first-class mail. Another example is the U.S. Postal Service in providing first-class mail.

Competition vs. Monopoly In competition, as well as monopoly, high prices and profits signal consumers’ demand for more production. In competition, as well as monopoly, high prices and profits signal consumers’ demand for more production. In competition, the high profits attract new suppliers. In competition, the high profits attract new suppliers. In monopoly, barriers to new businesses are erected to exclude potential competition. In monopoly, barriers to new businesses are erected to exclude potential competition.

Competition vs. Monopoly In competition, average costs of production approach their minimum. In competition, average costs of production approach their minimum. In monopoly, average costs are not necessarily at or near a minimum. In monopoly, average costs are not necessarily at or near a minimum.

Competition vs. Monopoly In competition, the profit squeeze pressures businesses to reduce costs or improve product quality. In competition, the profit squeeze pressures businesses to reduce costs or improve product quality. In monopoly, there is no profit squeeze to pressure the business to reduce costs or improve product quality. In monopoly, there is no profit squeeze to pressure the business to reduce costs or improve product quality.

WHAT Gets Produced There is a basic tendency for monopolies to inhibit economic growth. There is a basic tendency for monopolies to inhibit economic growth. There is no pressure to produce at minimum average cost. There is no pressure to produce at minimum average cost.

FOR WHOM Higher prices charged by monopolists favor purchases by higher-income consumers. Higher prices charged by monopolists favor purchases by higher-income consumers. Monopolists get fat profits and thus access to more goods and services. Monopolists get fat profits and thus access to more goods and services.

HOW Monopolists have less of an incentive to innovate. Monopolists have less of an incentive to innovate. They can continue to make profits with existing equipment and technology. They can continue to make profits with existing equipment and technology. There is a tendency to inhibit technological improvement by keeping competition out of the market. There is a tendency to inhibit technological improvement by keeping competition out of the market.

Any Redeeming Qualities? Despite the strong and general case to be made against monopoly, monopolies could also benefit society. Despite the strong and general case to be made against monopoly, monopolies could also benefit society.

Research and Development In principle, monopolies have a greater ability to pursue research and development. In principle, monopolies have a greater ability to pursue research and development. They have the resources available to invest in expensive research and development. They have the resources available to invest in expensive research and development.

Research and Development Monopolies have no clear incentive for invention and innovation. Monopolies have no clear incentive for invention and innovation. They can continue to make profits by maintaining market power. They can continue to make profits by maintaining market power.

Entrepreneurial Incentives The promise of even greater profits is a strong incentive for monopolies to innovate. The promise of even greater profits is a strong incentive for monopolies to innovate. Innovators also have the ability to earn large profits. Innovators also have the ability to earn large profits.

Potential Competition Potential competition is a threat even to monopolies. Potential competition is a threat even to monopolies. This may cause them to behave more competitively. This may cause them to behave more competitively. The experience with the Model T suggests that potential competition can force a monopoly to change its ways. The experience with the Model T suggests that potential competition can force a monopoly to change its ways.