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CHAPTER 11 - MONOPOLY AND PRICE SEARCHERS Cartel Case Study: NYC Taxis, p. 436 and 459. PURE MONOPOLY Pure Monopoly: Market with a single (1) seller. Near Monopoly: Market where a single firm, or several firms, has (have) 90% or more of the "market." Cartel: A group of firms that acts as a monopolist. Problem: How to tell the difference between: a) monopoly power leading to a single dominant firm (coercive, anti-competitive monopoly) and b) an extremely efficient firm that emerges as an industry leader and becomes the dominant firm, e.g. Alcoa? Precondition for a true monopoly: a) High barriers to entry and b) Monopolist produces a good for which there is no good substitute. Problem: what is "high" and what is a “good,” point out the ambiguity of "monopoly." Price and Output Decision for Monopolist (one seller), graph p. 438, Figure 11.1. Being insulated from competition somehow, the firm can raise price and not attract competition. However, it has to charge a realistic price based on market demand - even a monopolist faces a downward sloping demand curve; therefore there is a limit to the price it can charge. At very high prices, the monopolist would lose all its customers. Also, note that a monopolist can lose money, e.g. there are thousands of patents that give the inventor protection from competition (monopoly privilege) for 17 years, but are not commercially viable, either because ATC is too high or P is too low, and firm would lose money trying to produce the good. See p. 439, Figure 11.2, only if market demand is D 1 will the monopolist make money. A profit-maximizing monopolist facing a downward sloping demand curve, and would act like any other profit-maximizing firm and increase output as long as MR > MC, and would produce Q* where MR = MC. In Figure 11.1, the monopolist produces Q m * and charges P m *. When producing Q m , P m > ATC, and TR > TC, and Econ Profits > 0. The green shaded area in Figure 11.1 represents the monopoly profits. POINT: Without barriers to entry, the Pos Econ Profits on p. 438 would attract competition from other firms, and in the LR profits would get driven to zero as Price was driven down to ATC. However, with some legal protection against competition (e.g. patent protection), the monopolist could sustain the economic profits in the LR. Example of possible "monopolies": ECN 469: Managerial Economics Professor Mark J. Perry 1
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1. Xerox Corporation, developed the first copiers in the late 60s, and had monopoly patent protection, giving it 95% market share in the 70s. However, eventually the patents expired, and even before that other firms developed new and even better copier technology with new technology (without infringing on Xerox's patents). Now, Xerox is just one of about 12 firms in the global copier market. Illustrates how innovation, advances in technology, dynamic changes in the market erode a dominant firm's market share. For example, the case of IBM. ... 2. Acting like a cartel, the American Medical Association (AMA) once had very strict control over the
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This note was uploaded on 01/23/2012 for the course ECON 469 taught by Professor Staff during the Fall '11 term at University of Michigan.

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