Cha_12 - 12 Chapter MONOPOLY Chapter Key Ideas Dominating...

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12 C h a p t e r K e y I d e a s Dominating the Internet A. Most buyers use e-Bay for auctions because most sellers use e-Bay for auctions. Most companies and organizations list their websites on Google because most internet browsing customers use Google to search the web. 1. These firms clearly have little competition and enjoy significant market power (ability to influence market price), so these firms can’t be operating in a perfectly competitive market. 2. Is there anything different about how firms with market power operate? Do industries with a singularly dominant firm behave differently than competitive ones? B. Students get lots of price breaks—at the movies. Seniors get price breaks at restaurants. Business travelers tend to pay higher prices for tickets on the airlines. 1. How do firms get different people to pay different prices? 2. How can it be profit maximizing to offer lower prices to some customers but higher prices to others? O u t l i n e 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. C h a p t e r
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3 0 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.
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Cha_12 - 12 Chapter MONOPOLY Chapter Key Ideas Dominating...

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