2 pure monopoly.docx - Lecture_02 PURE MONOPOLY We turn now...

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Lecture_02. PURE MONOPOLY We turn now from pure competition to pure monopoly, which is at the opposite end of the spectrum of industry structures. This will be the first of three models of imperfect competition. 1. An Introduction to Pure Monopoly Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. Here are the main characteristics of pure monopoly: Single seller . The firm and the industry are synonymous. No close substitutes. A pure monopoly’s product is unique Price maker. The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a price maker . The pure monopolist confronts the usual downward-sloping product demand curve. It can change its product price by changing the quantity of the product it produces. Blocked entry. A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type. Nonprice competition. The product produced by a pure monopolist may be either standardized (as with natural gas and electricity) or differentiated (as with Windows). Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products’ attributes. Examples of Monopoly. Examples of pure monopoly are relatively rare, but there are many examples of less pure forms. In most cities, government-owned or government-regulated public utilities – natural gas and electric companies, the water company, the cable TV company, and the local telephone company – are all monopolies or virtually so. There are also many “near-monopolies” in which a single firm has the bulk of sales in a specific market. Barriers to Entry. The factors that prohibit firms from entering an industry are called barriers to entry. In pure monopoly, strong barriers to entry effectively block all potential competition. Somewhat weaker barriers may permit oligopoly. 1) Economies of Scale. When long-run ATC is declining, only a single producer, a monopolist, can produce any particular output at minimum total cost. In the extreme circumstance, in which the market demand curve cuts the long-run ATC curve where average total costs are still declining, the single firm is called a natural monopoly. As with any monopolist, a natural monopolist may, instead, set its price far above ATC and obtain substantial economic profit. In that event, the lowest-unit- cost advantage of a natural monopolist would accrue to the monopolist as profit and not as lower prices to consumers. That is why the government regulates some natural monopolies, specifying the price they may charge.

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