Ch12-7e[1] - MONOPOLY 12 CHAPTER Objectives After studying...

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Unformatted text preview: MONOPOLY 12 CHAPTER Objectives After studying this chapter, you will able to Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly Explain how a single-price monopoly determines its output and price Compare the performance and efficiency of single-price monopoly and competition Objectives After studying this chapter, you will able to Define rent seeking and explain why it arises Explain how price discrimination increases profit Explain how monopoly regulation influences output, price, economic profit, and efficiency Dominating the Internet eBay and Google are dominant players in the markets they serve. These firms are not like the firms in perfect competition. How do firms that dominate their markets behave? Students get lots of price breaksat the movies, hairdresser, and on the airlines. Why? How can it be profit maximizing to offer lower prices to some customers? Market Power Market power and competition are the two forces that operate in most markets. Market power is the ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. A monopoly is an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. Market Power How Monopoly Arises A monopoly has two key features: No close substitutes Barriers to entry Legal or natural constraints that protect a firm from potential competitors are called barriers to entry . Market Power There are two types of barriers to entry: legal and natural. Legal barriers to entry create a legal monopoly , a market in which competition and entry are restricted by the granting of a: Public franchise (like the U.S. Postal Service public franchise to deliver first-class mail). Government license (like a license to practice law or medicine) Patent and copyright Market Power Natural barriers to entry create a natural monopoly , which is an industry in which one firm can supply the entire market at a lower price than two or more firms can. Figure 12.1 illustrates a natural monopoly. Market Power One firm can produce 4 units of output at 5 cents per unit. Two firms can produce 4 units2 units eachat 10 cents per unit. Four firms can produce 4 units1 unit eachat 15 cents per unit. Market Power In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met. The ATC curve is still sloping downward when it meets the demand curve. Market Power Monopoly Price-Setting Strategies For a monopoly firm to determine the quantity it sells, it must choose the appropriate price....
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This note was uploaded on 02/24/2012 for the course ACCOUNTING 504 taught by Professor Abeer during the Spring '09 term at Yarmouk University.

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Ch12-7e[1] - MONOPOLY 12 CHAPTER Objectives After studying...

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