Chapter 21 Monopoly - CHAPTER 23 Monopoly Chapter 22...

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CHAPTER 23 Monopoly Chapter 22 introduced students to the theory of perfect competition and the workings of the perfectly competitive market. Chapters 23 and 24 deal with markets that are not perfectly competitive. They are, in fact, often referred to as “structural market failures.” This chapter focuses upon the theory of monopoly and optimal behavior for a monopolist. In so doing, we see the polar opposite to perfect competition. Here we have one firm with considerable market power that sets its own prices, can make a sustained economic profit, and has little concern over new competition—all factors that are different from perfect competition. Chapter 23 begins with the theory of monopoly, paying particular attention to the issue of barriers to entry , then moves to optimal short-run and long-run pricing and output behavior for the monopolist, price discrimination, and, finally, the welfare costs of monopoly (as compared to perfect competition). CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Discuss the theory of monopoly. 2. Explain the differences between perfect competition and monopoly. 3. Distinguish between government monopoly and market monopoly. 4. Discuss the case against monopoly. 5. Explain why rent seeking is socially wasteful. 6. Identify the conditions under which a firm may price discriminate. 7. Describe the effects of price discrimination. KEY TERMS monopoly • X-inefficiency public franchise price discrimination natural monopoly perfect price discrimination price searcher second-degree price discrimination deadweight loss of monopoly third-degree price discrimination rent seeking • arbitrage 224
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225 Chapter 23 CHAPTER OUTLINE I.THE THEORY OF MONOPOLY A.Basic Assumptions —The theory of monopoly rests on three basic assumptions: 1.There Is One Seller —In a pure monopoly there is only one seller, meaning that the firm is the industry and will, therefore, have significant influence over price. 2.The Single Seller Sells a Product for Which There Are No Close Substitutes —The monopolist sells a product for which there are no close substitutes; thus, the monopolist faces little, if any, competition. 3.There Are Extremely High Barriers to Entry —Government restrictions, high costs, and/or exclusive ownership of vital resources make it very hard (if not impossible) for new firms to enter the monopolized industry, further limiting the competition faced by monopolists. B.Barriers to Entry: A Key to Understanding Monopoly —Where do entry barriers come from? 1.Legal Barriers —One major source of monopoly power is government. The government grants monopoly status to firms in three ways: a.Public Franchise —a right granted to a firm by government that permits the firm to be the exclusive provider of a particular good or service. What the government gives, the government can take away.
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