110Ch12 - Chapter 12 Monopoly Objectives Explain how a...

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Chapter 12: Monopoly – Objectives Explain how a monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly Explain how a single-price monopoly determines its output and price Compare the performance and efficiency of single-price monopoly and competition Explain how price discrimination increases profit Explain how monopoly regulation influences output, price, economic profit, and efficiency
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Dominating the Internet eBay and Google are dominant players in the markets they serve. These firms are not like the firms in perfect competition. How do firms that dominate their markets behave? Students get lots of price breaks—at the movies, hairdresser, and on the airlines. Why? How can it be profit maximizing to offer lower prices to some customers?
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Market Power Market power and competition are the two forces that operate in most markets. Market power is the ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. 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 preventing the entry of new firms.
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Market Power How Monopoly Arises A monopoly has two key features: No close substitutes Barriers to entry Legal or natural constraints that protect a firm from potential competitors are called barriers to entry . There are two types of barriers to entry: legal and natural.
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Legal Barriers to Entry Legal barriers to entry create a legal monopoly , a market in which competition and entry are restricted by the granting of a: Public franchise (like the U.S. Postal Service public franchise to deliver first-class mail). Government license (like a license to practice law or medicine) Patent and copyright
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Natural Barrier to Entry Natural barriers to entry create a natural monopoly , which is an industry in which one firm can supply the entire market at a lower price than two or more firms can. The figure illustrates a natural monopoly.
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Natural Barrier to Entry One firm can produce 4 units of output at 5 cents per unit. Two firms can produce 4 units—2 units each—at 10 cents per unit. Four firms can produce 4 units—1 unit each—at 15 cents per unit.
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Natural Barrier to Entry In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met. The ATC curve is still sloping downward when it meets the demand curve.
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Monopoly Price-Setting Strategies For a monopoly firm to determine the quantity it sells, it must choose the appropriate price. There are two types of monopoly price-setting strategies: Price discrimination is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms.
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