Chapter15 Additional Insights - Chapter 15 Monopoly[NOTE...

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Chapter 15: Monopoly [NOTE: Skip “Appendix A” at the end of the chapter.] Now that we understand how a firm in a perfectly competitive industry makes economic decisions regarding output and price, we next look at a monopoly, which is at the other end of the industry spectrum. “Monopoly” is a compound word: “mono” means one and “poly” means many….so a monopoly is an industry in which one firms produces and sells output to many buyers. Officially, a monopoly exists when one firm produces the entire market output for which there are no close substitutes for the output. In our economy, we consider a perfectly competitive situation to be a good thing and monopoly behavior to be a bad thing….why? The explanation will be given later! But in the meantime, even though we discourage monopoly behavior (via strong antitrust legislation and judicial enforcement), we live with monopolies on a daily basis. Here are some types of monopolies and examples which will be vary familiar to you. Types of monopolies: 1. Natural monopoly – a “legal” monopoly that is established/allowed when either or both of the following conditions exist: o Economies of scale exist over a wide range of output so that one firm can supply the entire market at a lower per unit cost than two or more firms would be able to produce; usually due to technology; example: Prior to the mid- 1970s, telephone service was provided by only one company, AT&T, because the technology was such that it was cheaper for telephone service to be provided by only one company. However, there was a long, major court case in which the courts upheld that it was no longer economically advantageous for telephone service to be provided by one company. As a result, AT&T was broken up into smaller “Ma Bell” companies and other companies were allowed to enter into the telephone communication industry (such as MCI, Sprint, etc.).
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