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Chapter 24 Monopoly

Chapter 24 Monopoly - Monopoly Price-searcher Markets with...

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Monopoly Price-searcher Markets with High Entry Barriers Chapter 24
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What is a monopoly? Greek for “single seller”: Commonly defined as single seller of a well defined product with No good substitutes, and High barriers to entry [ambiguous: no good substitutes? High barriers? Both relative!] Why are barriers high? Economies of scale [implies one large efficient firm] Control over an essential resource [bauxite] Patents [new drugs, inventions] Government licensing [taxis, cable TV, DeBeers, etc.]
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Two types of monopolies: Coercive monopoly: The arbitrary power of a single firm to overprice by “understocking” (restrict supply) the market, thereby persistently making economic profits (charge higher prices) and no one can compete against the power. Obviously, economically harmful! Natural monopoly: The possibility that a single firm can meet the entire demand of the market by producing such a good quality product at such a low price that it is difficult to compete against it. Usually huge market—not possible
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Price & output for a coercive-type monopoly: Monopolies by definition face the entire market demand (D). In this case, MR < P on the demand curve (D). P Q TR MR 12 0 0 *** 11 1 11 11 10 2 20 9 9 3 27 7 8 4 32 5 7 5 35 3 6 6 36 1 5 7 35 -1 4 8 32 -3 3 9 27 -5 2 10 20 -7 1 11 11 -9 0 2 4 6 8 10 12 0 2 4 6 8 10 12 MR D
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Coercive monopoly understocks the market. Profit maximizing level of output rule: MR = MC Q D MR MC ATC PM C PROFIT Total Costs In this case, the monopolist expands output to where MR = MC and charges the corresponding P along the D curve. Recall high barriers insulate seller from competition. Here, P > MC (see graph) Economic problem of coercive monopoly power: Allocative inefficiency—market is understocked. High prices and profits persist. “Rent seeking” occurs as monopolists seek to curry political favors to maintain government protection. Thus, the can persist in profits
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Losses can occur in the short run even for monopolies (see graph). Q D MR MC ATC PM C LOSS Again, the monopolist expands output to where MR = MC and charges the corresponding P along the D curve.
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