chap10 - Chapter 10: Monopoly and Other Forms of Imperfect...

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Chapter 10: Monopoly and Other Forms of Imperfect Competition
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The Perfectly Competitive Firm Is a Price Taker (Recap) The perfectly competitive firm has no influence over the market price. It can sell as many units as it wishes at that price. Typically, a "perfectly" competitive industry is one that consists of a large number of sellers, each of which makes a highly standardized product. And there is free entry and exit in this market.
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Imperfect Competition Monopoly = "single seller" Oligopoly = "few sellers" Monopolistic competition : Many sellers, each with a differentiated product
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Monopoly: Cablevision in the Stony brook market for cable TV service Oligopoly: The market for wireless telephone service
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Monopolistic competition: Local gasoline retailing
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Five Sources of Market Power Market power: a firm’s ability to raise the price of a good without losing all its sales. 1. Exclusive control over important inputs. Example: Perrier's mineral spring
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2. Economies of Scale (Natural monopoly) Constant returns to scale (CRS): a production process is CRS if, when all inputs are changed by a given proportion, the output changes by the same proportion. Increasing returns to scale (IRS): a production process is IRS if, when all inputs are changed by a given proportion, the output changes by more than that proportion; also called economies of scale Example of economies of scale: telecommunication, water services, electricity, mail delivery
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3. Patents Example: Prescription drugs 4. Government licenses or franchises Example: Burger King on Mass Pike
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5. Network Economies Example: Microsoft Windows, video games and console Network economies may be thought of as a kind of economies of scale. Most enduring source of monopoly is economies of scale.
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Economies of scale: example Two video game producers, Sony and Microsoft Each game has a fixed cost of $0.2 million (such as office space, programmers, equipments), and variable costs of $0.80 per copy (for example, cost of a disk)
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Microsoft Sony annual production: 1 million 2 million fixed costs: $0.2 million $0.2 million variable costs: $0.8 million $1.6 million total costs: $ 1 million $ 1.8 million cost per copy: $1.00 $0.90 Sony, the high volume producer, has only a cost advantage of 10 cents.
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Microsoft Sony annual production: 1 million 4 million fixed costs: $0.2 million $0.2 million variable costs: $0.8 million $3.2 million total costs: $ 1 million $3.4 million cost per copy: $1.00 $0.85 With a even larger production, Sony now has a larger cost advantage (15 cents ).
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Suppose the fixed cost increased to 1 million Microsoft Sony annual production: 1 million 4 million fixed costs: $1 million $1 million variable costs: $0.8 million $3.2 million total costs: $ 1.8 million $4.4 million cost per copy: $1.80 $1.10 With a larger fixed cost, the high volume production has a larger cost-advantage.
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Profit-maximization for the perfectly competitive firm Profit = Total revenue - total cost Q. How much output should a perfectly competitive firm
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chap10 - Chapter 10: Monopoly and Other Forms of Imperfect...

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