This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ave only one bookstore.
Professors tell the campus bookstore manager the books they want
their students to buy, and the bookstore orders the books. During the
first weeks of classes, students usually go to the bookstore and buy the
books they need. They often complain about the high price of textbooks; it is not uncommon for
textbooks to sell for $100 or more.
Many college students feel that
to a large degree, the campus bookstore acts as a monopolist. It is a
single seller of a good (required
textbooks) that has no substitutes
(the student has to buy the book
the professor is using in class, not a
book that is similar). Usually the
university administration will not
allow more than one bookstore on
campus (so barriers to entry are
high). In a way, we might consider
the campus bookstore a local or natural monopoly
A firm with such a low
average total cost (perunit cost) that only it can
survive in the market. geographic monopoly: it is the single seller of a good with no good
substitutes and high barriers to
entry in a certain location—the university campus.
Enter the Internet, which has, to
a large degree, destroyed many
local or geographic monopolies.
College students no longer have to
buy their textbooks from their campus bookstore. They can buy them
from an online bookstore such as
Amazon.com, which often discounts
the books it sells. In other words,
the Internet essentially eliminates
the barrier to entering any campus’s
Similarly, some people think that
the Internet eliminates local monopolies in cars, although the case is
less strong here. Suppose you live $10 and average total cost is $4, then perunit profit is $6.
Some companies may have such a low
average total cost that they are able to lower
their prices to a very low level and still earn
profits. Consequently, competitors may be
forced out of business. Suppose 17 companies are currently competing to sell a good.
One of the companies, however, has a much 198 Chapter 8 Competition and Markets in a town with only one Ford dealership. It is true that the dealership
may be the sole seller of Fords
within a certain area (say, a radius
of 40 miles), but substitutes for a
Ford (for example, a Honda) are
available. Nevertheless, it is possible
for a single Ford dealership to have
a certain degree of monopoly
power. If you want a Ford, you
are inclined to go to that Ford
Again, the Internet changes that
situation. First, at various online sites
you can obtain the invoice price of
any car you are thinking about buying. Second, you can contact Ford
dealers in nearby areas via the
Internet and ask them if they are
willing to sell you a Ford for, say,
$1,500 over invoice price. Now,
instead of negotiating with the only
Ford dealership in town, you can
negotiate with several dealerships
over the Internet.
ABOUT IT The Internet is used to
weaken local (or geographic) monopolies in textbooks
and cars. Can you identify any other
kinds of local monopolies threatened by the Internet? lower average total cost than the others. Say
company A’s average total cost is $5, whereas
the other companies’ average total cost is $8.
Company A can sell its good for $6 and earn
a $1 profit on each unit sold. Other companies cannot compete with it. In the end,
company A, because of its low average total
cost, is the only seller of the good; such a
firm is called a natural monopoly. 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 199 E X A M P L E : T hree companies, A, B,
and C, all sell a particular good. The perunit costs of company A are $4 while the
per-unit costs for B and C are $7. Currently,
all three companies sell their good for a
price of $10. In time, company A lowers its
price to $6, but companies B and C cannot
follow suit. For them to lower price to $6
would mean they would incur a $1 perunit loss on each item they produce and
sell. Because of its lower price, customers
start buying from company A instead of
from B and C. In time, companies B and C
go out of business. Exclusive Ownership of a Scarce
It takes oranges to produce orange juice.
Suppose one firm owned all the oranges; it
would be considered a monopoly firm. The
classic example of a monopolist that controls a resource is the Aluminum Company
of America (Alcoa). For a long time, this
company controlled almost all sources of
bauxite (the main source of aluminum) in
the United States, making Alcoa the sole
producer of aluminum in the country from
the late nineteenth century until the 1940s. Government Monopoly and Market
Sometimes high barriers to entry exist
because competition is legally prohibited,
and sometimes they exist for other reasons.
Where high barriers take the form of public
franchises, patents, or copyrights, competition is legally prohibited. In contrast, where
high barriers take the form of one firm’s
low average total cost or exclusive ownership of a resource, competition is not legally
prohibited. In these cases, no law keeps rival
firms from entering the market and competing, even thoug...
View Full Document
This document was uploaded on 01/16/2014.
- Winter '14