During the first weeks of classes students usually go

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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 textbook market. 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 dealership. 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. THINK 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 Resource 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 Monopoly 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...
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This document was uploaded on 01/16/2014.

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