Special Case: Monopolies Monopoly refers to a situation in which one firm is the only seller in a market. This usually results in very high prices, since there is no competition to keep prices in check. For example, Pepsi and Coke cost about the same amount of money. If Pepsi were to charge twice as much, most people would choose to buy Coke, and Pepsi would lose business and revenue. However, if Coke did not exist, and Pepsi were the only cola supplier in the market, Pepsi could charge twice as much; without any other options, people would buy Pepsi at the higher price, and Pepsi would have a huge profit margin. In a competitive market, firms are price-takers, that is, they are too small to be able to set prices for the market to follow, so they cannot charge as much as they want, since their competitors can undercut them and win all of the customers. Monopolists, however, can set prices as they please, since they have no fear of competition.
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.