Chapter 14 - Krugman_CH14_333 11/11/04 3:25 PM Page 333...

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chapter 333 14 >> FEW YEARS AGO D E B EERS , THE world’s main supplier of dia- monds, ran an ad urging men to buy their wives diamond jewelry. “She married you for richer, for poorer,” read the ad. “Let her know how it’s going.” Crass? Yes. Effective? No question. For generations diamonds have been a symbol of luxury, valued not only for their appear- ance but also for their rarity. But geologists will tell you that diamonds aren’t all that rare. In fact, according to the Dow Jones-Irwin Guide to Fine Gems and Jewelry , diamonds are “more common than any other gem-quality colored stone. They only seem rarer . . .” Why do diamonds seem rarer than other gems? Part of the answer is a brilliant marketing campaign (We’ll talk more about marketing and product differentiation in Chapter 16.) But mainly diamonds seem rare because De Beers makes them rare: the company controls most of the world’s diamond mines and limits the quantity of diamonds supplied to the market. Monopoly EVERYBODY MUST GET STONES A What you will learn in this chapter: The significance of monopoly, where a single monopolist is the only producer of a good How a monopolist determines its profit-maximizing output and price The difference between monopoly and perfect competition, and the effects of that difference on society’s welfare How policy makers address the problems posed by monopoly What price discrimination is, and why it is so prevalent when producers have market power Up to now we have concentrated exclu- sively on perfectly competitive markets—mar- kets in which the producers are perfect competitors. But De Beers isn’t like the pro- ducers we’ve studied so far: it is a monopolist , the sole (or almost sole) producer of a good. Monopolists behave differently from produc- ers in perfectly competitive industries: whereas perfect competitors take the price at which they can sell their output as given, monopo- lists know that their actions affect market prices and take that effect into account when decid- ing how much to produce. Before we begin our analy- sis, let’s step back and look at monopoly and perfect competition as parts of a broader system for classi- fying markets. Perfect competition and monopoly are partic- ular types of market struc- ture. They are particular categories in a system economists use to classify markets and industries according to two main dimensions . This chapter begins with a brief overview of types of market structure. It will help us here and in subsequent chapters to understand on a deep- er level why markets differ and why producers in those markets behave quite differently. Got stones? Corbis Krugman_CH14_333 11/11/04 3:25 PM Page 333
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Types of Market Structure In the real world, there is a mind-boggling array of different markets. We observe widely different behavior patterns by producers across markets: in some markets pro- ducers are extremely competitive; in others, they seem somehow to coordinate their
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Chapter 14 - Krugman_CH14_333 11/11/04 3:25 PM Page 333...

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