lec21 - How Monopoly Arises Monopoly • A monopoly is an...

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2010-05-18 1 Monopoly How Monopoly Arises A monopoly is an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier protected from competition by a barrier preventing the entry of new firms. How Monopoly Arises No Close Substitutes If a good has close substitutes, it faces competition from the producer of the substitute. Barriers to Entry Barriers to entry are legal or natural constraints that protect a firm from potential competitors. How Monopoly Arises Legal Barriers to Entry In a legal monopoly competition and entry is restricted by the granting of a public franchise , government license , patent , or copyright . Sources of Market Power Monopoly: There is a single supplier or there is a d ominant supplier of a product. Microsoft in the supply of PC’s operating system. Sources of Market Power: Intellectual property rights Patent (20 years): telephone; aspirin; penicillin; Trade secret: Coca cola; source codes; chip designs How Monopoly Arises Natural Barriers to Entry natural monopoly results from a situation in which one firm can supply the entire market at a lower price than two or more firms can. Example: Electric utility
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2010-05-18 2 Economy of Scale Economies of Scale: Average cost declines as the scale of production increases. Minimum Efficient Scale (MES) is the minimum “Q” required to produce at minimum average cost. Economies of scale and MES are generally larger when fixed costs (Plant, R&D, etc) are large while average variable cost does not increase rapidly.
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lec21 - How Monopoly Arises Monopoly • A monopoly is an...

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