Chapter 15 - Chapter Introduction Monopoly If you own a...

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Unformatted text preview: Chapter Introduction Monopoly If you own a personal computer, it probably uses some version of Windows, the operating system sold by the Microsoft Corporation. When Microsoft first designed Windows many years ago, it applied for and received a copyright from the government. The copyright gives Microsoft the exclusive right to make and sell copies of the Windows operating system. If a person wants to buy a copy of Windows, he or she has little choice but to give Microsoft the approximately $100 that the firm has decided to charge for its product. Microsoft is said to have a monopoly in the market for Windows. Microsoft's business decisions are not well described by the model of firm behavior we developed in the previous chapter. In that chapter, we analyzed competitive markets, in which there are many firms offering essentially identical products, so each firm has little influence over the price it receives. By contrast, a monopoly such as Microsoft has no close competitors and, therefore, has the power to influence the market price of its product. While a competitive firm is a price taker, a monopoly firm is a price maker. In this chapter, we examine the implications of this market power. We will see that market power alters the relationship between a firm's costs and the price at which it sells its product. A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price equals marginal cost. By contrast, a monopoly charges a price that exceeds marginal cost. This result is clearly true in the case of Microsoft's Windows. The marginal cost of Windows–the extra cost that Microsoft incurs by printing one more copy of the program onto a CD–is only a few dollars. The market price of Windows is many times marginal cost. It is not surprising that monopolies charge high prices for their products. Customers of monopolies might seem to have little choice but to pay whatever the monopoly charges. But if so, why does a copy of Windows not cost $1,000? Or $10,000? The reason is that if Microsoft sets the price that high, fewer people would buy the product. People would buy fewer computers, switch to other operating systems, or make illegal copies. A monopoly firm can control the price of the good it sells, but because a high price reduces the quantity that its customers buy, the monopoly's profits are not unlimited. As we examine the production and pricing decisions of monopolies, we also consider the implications of monopoly for society as a whole. Monopoly firms, like competitive firms, aim to maximize profit. But this goal has very different ramifications for competitive and monopoly firms. In competitive markets, self- interested consumers and producers behave as if they are guided by an invisible hand to promote general economic well-being. By contrast, because monopoly firms are unchecked by competition, the outcome in a market with a monopoly is often not in the best interest of society. market with a monopoly is often not in the best interest of society....
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Chapter 15 - Chapter Introduction Monopoly If you own a...

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