Intermediate Microeconomics: A Modern Approach, Seventh Edition

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1 Monopoly
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2 Four Basic Market Structures Perfectly Competitive : many firms, identical products, free entry and exit, full and symmetric info Monopoly : single firm, no close substitutes, barriers to entry, full and symmetric info Oligopoly : several firms, similar products, degree of product differentiation varies depending upon the market, might be barriers, full and symmetric info Monopolistic competition : many firms, similar products, slightly differentiated products, free entry and exit, full and symmetric info
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3 Competitive Market This is the classic “textbook” market structure. Firms in a competitive market all make a product that is perfectly substitutable: all demanders are equally satisfied with any supplier’s product.
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4 Monopoly The single seller makes a product that has no “good” substitute. Other firms may be able to produce the good or service but choose not to enter the market or are barred from it.
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5 Oligopoly A few sellers make products that are good, but not perfect, substitutes. Consumers can be induced to change suppliers but have only a limited number of choices.
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6 Monopolistic Competition The market has many firms but each supplier’s product is differentiated. Consumers can be induced to change brands but they have brand preferences.
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7 Question What is the market structure for each of these products or firms: competitive, monopoly, oligopoly, monopolistic competition? The Campus Store Kinko’s Pepperidge Farm’s Whole Wheat Bread PowerMac computer Windows computer NYSEG (electricity utility) Morton salt AT&T long distance
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8 Answer The Campus Store: most products competitive, textbooks oligopoly, but location is very important. Kinko’s: monopolistic competition (differentiated service) Pepperidge Farm’s Whole Wheat Bread: competition or monopolistic competition (slightly differentiated recipes) PowerMac computer and clones: monopoly, under license. Windows computer: monopolistic competition (differentiated features) NYSEG (electricity utility): monopoly Morton salt: competitive AT&T long distance: oligopoly
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9 Monopoly single firm no close substitutes barriers to entry full and symmetric information
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10 Sources of Monopoly Entry Barriers Natural monopoly: the most efficient scale of production is so large, relative to market demand, that a single firm dominates the market. Patents, copyrights, licenses, franchises: government protection of a firm’s right to produce a unique product. Economic and/or legal restrictions, strategies or situations that make entry more difficult for new competitors than for the existing monopoly firm.
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11 Natural Monopolies Goods and services whose delivery requires the construction of a physical network (wires, pipes, etc..) In such industries (local phone service, water, sewage removal, electricity, gas) the physical networks display decreasing marginal cost over essentially all quantities.
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