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NotesChapter24 - CHAPTER TWENTY-FOUR PURE MONOPOLY LECTURE...

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CHAPTER TWENTY-FOUR PURE MONOPOLY LECTURE NOTES I. Pure Monopoly: An Introduction A. Definition: A pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. B. There are a number of products where the producers have a substantial amount of monopoly power and are called °near± monopolies. C. There are several characteristics that distinguish pure monopoly. 1. There is a single seller so the firm and industry are synonymous. 2. There are no close substitutes for the firm²s product. 3. The firm is a °price maker,± that is, the firm has considerable control over the price because it can control the quantity supplied. 4. Entry into the industry by other firms is blocked. 5. A monopolist may or may not engage in nonprice competition. Depending on the nature of its product, a monopolist may advertise to increase demand. C. Examples of pure monopolies and °near monopolies.± 1. Public utilities³gas, electric, water, cable TV, and local telephone service companies³are pure monopolies. 2. First Data Resources (Western Union), Wham-o (Frisbees) and the DeBeers diamond syndicate are examples of °near± monopolies. (See Last Word.) 3. Manufacturing monopolies are virtually nonexistent in nationwide U.S. manufacturing industries. 4. Professional sports leagues grant team monopolies to cities. 5. Monopolies may be geographic. A small town may have only one airline, bank, etc. D. Analysis of monopolies yields insights concerning monopolistic competition and oligopoly, the more common types of market situations. (See Chapter 25.) II. Barriers to Entry Limiting Competition A. Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale. (See Figure 22-9b and Figure 24-1.) 1. Public utilities are known as natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying existing demand. 2. Government usually gives one firm the right to operate a public utility industry in exchange for government regulation of its power. 3. The explanation of why more than one firm would be inefficient involves the description of the maze of pipes or wires that would result if there were competition among water companies, electric utility companies, etc.
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B. Legal barriers to entry into a monopolistic industry also exist in the form of patents and licenses. 1. Patents grant the inventor the exclusive right to produce or license a product for seventeen years; this exclusive right can earn profits for future research, which results in more patents and monopoly profits.
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