Monopolies
,Intro
MONOPOLY : a market served by a
single seller of a product with no close substitutes
we will discuss 5 factors that lead to this market structure :
* control over hey inputs
* economies of scale
* patents
* network economies
* government licenses
·
Monopolies maximize profits in short run where MR = MC (same as perf competitive firms)
·
Monopoly equilibrium does not exhaust all potential gains from trade
(monopoly is less efficient than perfectly competitive firms)
·
How should govt treat monopolies ? Policy alternatives >
-
state ownership
>
-
private ownership w
govt regulation
>
competitive bidding by private firms
-
for the right to be sole provider
>
-
antitrust laws to prevent monopolies
>
laiss22-faire/hands-off policy
-
, Defining Monopoly
A monopoly exists when . . . 1) A
single
firm is the sole seller of a product
2) A product has no close substitutes
-
Key Difference from perfect competition : Consumer's must rely on this firm alone
A monopolist demand is A firm perfect competition
·
single
·
curve in has
downward (serve market demand
sloping
whole a horizontal curve
Pr Pr
>
Q Q
Monopoly and Elasticity :
* Elasticity= how sensitive buyers in price
are to a
change
If demand is elastic responsive to price
change
buyers more
,
If demand inclastic
* is ,
buyers less responsive to price change
&
formula for elasticity : E = &Q/dp P/Q .
* for perfect competition * for Monopoly
identical sellers -only seller
many
-
therefore they price-maker
demand is perfectly elastic are a
-
-
curve
but it is limited
-small incr in price :
large
dor in demand Chave
pricing power
-price-taker (no
pricing power by demand elasticity (
NB : Practical test for monopoly power :
Cross-price elasticity of demand
(substitutes weak
does demand product
No
change I strong power
~
·
How much for a
price of substitute ?
change when
changes
alot substitutes close weak
a
Changes <
power
,Intro
MONOPOLY : a market served by a
single seller of a product with no close substitutes
we will discuss 5 factors that lead to this market structure :
* control over hey inputs
* economies of scale
* patents
* network economies
* government licenses
·
Monopolies maximize profits in short run where MR = MC (same as perf competitive firms)
·
Monopoly equilibrium does not exhaust all potential gains from trade
(monopoly is less efficient than perfectly competitive firms)
·
How should govt treat monopolies ? Policy alternatives >
-
state ownership
>
-
private ownership w
govt regulation
>
competitive bidding by private firms
-
for the right to be sole provider
>
-
antitrust laws to prevent monopolies
>
laiss22-faire/hands-off policy
-
, Defining Monopoly
A monopoly exists when . . . 1) A
single
firm is the sole seller of a product
2) A product has no close substitutes
-
Key Difference from perfect competition : Consumer's must rely on this firm alone
A monopolist demand is A firm perfect competition
·
single
·
curve in has
downward (serve market demand
sloping
whole a horizontal curve
Pr Pr
>
Q Q
Monopoly and Elasticity :
* Elasticity= how sensitive buyers in price
are to a
change
If demand is elastic responsive to price
change
buyers more
,
If demand inclastic
* is ,
buyers less responsive to price change
&
formula for elasticity : E = &Q/dp P/Q .
* for perfect competition * for Monopoly
identical sellers -only seller
many
-
therefore they price-maker
demand is perfectly elastic are a
-
-
curve
but it is limited
-small incr in price :
large
dor in demand Chave
pricing power
-price-taker (no
pricing power by demand elasticity (
NB : Practical test for monopoly power :
Cross-price elasticity of demand
(substitutes weak
does demand product
No
change I strong power
~
·
How much for a
price of substitute ?
change when
changes
alot substitutes close weak
a
Changes <
power
