15 Monopoly MV

15 Monopoly MV - Introduction A firm is considered a...

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CHAPTER 15 MONOPOLY 1 Introduction A firm is considered a monopoly if… It is the sole seller of its product Its product does not have close substitutes. Monopoly provides us with another benchmark on the extreme to examine how firms react with little competition. The key difference: A monopoly firm has market power , the ability to influence the market price of the product it sells. A competitive firm has no market power.
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CHAPTER 15 MONOPOLY 2 Why Monopolies Arises Barriers to entry are the key to the existence of monopolies. Three sources of barriers to entry: 1. A single firm owns a key resource. Example: DeBeers owns most of the world’s diamond mines
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CHAPTER 15 MONOPOLY 3 Why Monopoly Arises 2. The govt or other organization grants a single firm the exclusive right to produce the good. patents, copyrights public franchise, making one firm the exclusive legal provider: e.g. licensing, university bookstore
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CHAPTER 15 MONOPOLY 4 Why Monopolies Arise 3. Natural monopoly : a single firm can produce the entire market Q at lower ATC than could several firms (relative to the market demand). Q Cost ATC 1000 $50 Example: 1000 homes need electricity. Electricity Economies of scale due to huge FC ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. 500 $80
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CHAPTER 15 MONOPOLY 5 Examples of natural monopolies: Electricity, telephone, communications, water, software, etc Natural monopoly (and economies of scale) is most likely to occur in markets where fixed costs are very large. Small markets may be able to support only a single firm, e.g. small towns are prone to this type of monopoly.
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CHAPTER 15 MONOPOLY 6 4. Network Externality: The usefulness of the product increases with the number of people who use it. Examples: AT&T used to monopolize long-distance phone call markets. eBay crushed competitors who entered the online auction market late, such as Yahoo, Amazon.
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CHAPTER 15 MONOPOLY 7 Monopoly vs. Competition:  Demand Curves In a competitive market, the market demand curve slopes downward. but the demand curve for any individual firm’s product is horizontal at the market price.
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15 Monopoly MV - Introduction A firm is considered a...

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