Ch12 - Chapter 12: Monopoly I. Market Power A. Market power...

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C h a p t e r   1 2 :   M o n o p o l y I. Market Power A. Market power and competition are the two forces that influence the market structure of most markets. 1. Market power is the ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. 2. A monopoly is a firm that produces a good or service for which no close substitute exists and which is protected by a barrier that prevents other firms from selling that good or service. B. How a Monopoly Arises 1. A monopoly market has two key features: a) No close substitutes . The absence of any firms making close substitute goods or services allows the monopolist to avoid competition in the market. b) Barriers to entry . Legal or natural constraints that protect a firm from potential competitors are called barriers to entry . 2. There are two types of barriers to entry: a) Legal barriers to entry create a legal monopoly —a   market in which competition and entry are restricted by the granting of a public franchise, a government license, a patent, or a copyright. i) A public franchise exists when an exclusive right is granted to a firm to supply a good or service. For example, the U.S. Postal Service has a public franchise to deliver first-class mail. ii) A government license exists when the government controls entry into particular occupations, professions and industries. For example, a license is required to practice law. Licensing doesn’t always create a monopoly, but it does restrict competition. iii) A patent is an exclusive right granted to the inventor of a product or service, and a copyright is an exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work. Patents and copyrights don’t always create a monopoly, but because these rights can be sold, they do restrict competition. b) Natural barriers to entry create a natural monopoly , which is an industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost. Figure 12.1 shows the LRAC curve for an electrical power company that is a natural monopoly. C. Monopoly Price-Setting Strategies 1. Monopolies face a tradeoff between the price it charges and the quantity it can sell. For a monopoly firm to determine the quantity it sells, it uses its market power to choose the appropriate price. 2. There are two types of monopoly price-setting strategies: a) Price discrimination is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms.
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b) A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers. 3.
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Ch12 - Chapter 12: Monopoly I. Market Power A. Market power...

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