Monopoly

Monopoly - IndustryStructureII:Monopoly MANEC387...

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Adapted from Baye © 2002 Industry Structure II: Monopoly MANEC 387 MANEC 387 Economics of Strategy Economics of Strategy
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Adapted from Baye © 2002 The Structure of Industries Competitive Rivalry Threat of new Entrants Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers From M. Porter, 1979, “How Competitive Forces Shape Strategy”
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Adapted from Baye © 2002 Monopoly In a monopoly, one firm supplies the market  with little or no risk of entry The market demand curve is the demand  curve faced by the firm Marginal revenue no longer equals price –   elasticity is less than infinity which allows extraction  of monopoly rents Firm has control over price
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Adapted from Baye © 2002 Monopolist’s Marginal Revenue P Q Q Demand Elastic Inelastic Unitary Marginal Revenue Total Revenue ($)
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Adapted from Baye © 2002 Monopoly Power Natural sources Economies of scale Economies of scope Cost complementarities Created sources Patents and other legal barriers (like licenses) Tying contracts Exclusive contracts Collusion
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Adapted from Baye © 2002 Managing under Monopoly Monopolists choose the optimal quantity  given the demand curve – they cannot  choose both price and quantity Monopolists earn rents by restricting output  which sets price above economic costs Monopoly rents are sustained only if there is  no entry
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Monopoly - IndustryStructureII:Monopoly MANEC387...

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