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small, neighborhood store have a
monopoly? monopoly firm finds the highest price at
which it can sell its entire output.
Suppose you are taking a
long drive along a route that has only one gas
station. The sign reads: Last Chance for Gas
for 100 Miles. Gasoline is a product with
very few substitutes. You can’t put water in
your gas tank and hope that the car will run.
The gas station is a local monopolist; in other
words, it’s not that it is the only gas station in
the world, but it is the only gas station in a
certain small part of the world. The gas station owner decided that the best quantity of
gas for her to sell is 400 gallons. Now, of
course, she wants to find the highest price
per gallon at which she can sell all 400 gallons. She may have to “search” for this price.
Is $2.76 too low? Is $3.18 too high? It is likely
that through trial and error she will eventually figure out what the highest price is at
which she can sell all 400 gallons of gas.
EXAMPLE: QUESTION: You mentioned that the gas station is a local monopolist. I am interested in the word “local” here. Do you
mean to imply that a seller might be a
monopolist in one area but not in
ANSWER: Yes. Think of a small grocery
store instead of a gas station. The small
grocery store might be the only grocery store in 10 square miles, but not the only
grocery store in 20 square miles. Or
think of a bookstore on a university campus. Many university campuses have
only one bookstore that sells the textbooks that students buy. Some would
consider the bookstore in this setting a
monopolist. Of course, with the introduction of the Internet, this bookstore
isn’t as much a monopolist today as it
might have been in years gone by. Today,
students can buy many of their textbooks
online, either directly from the publisher
or from an online bookstore. How Selling Corn or Stock
Differs from Selling Cable
Perhaps nothing brings home the difference between a perfectly competitive seller (a
price taker) and a monopoly seller (a price
searcher) than placing yourself in the role of
each. First, suppose you are a corn farmer in
Iowa. You just harvested 100,000 bushels of
corn, and you want to sell them as quickly as
possible. It’s easy to determine at what price
you sell your corn: you just check the newspaper or listen to the crop report on the radio
or TV news to see what price corn is selling at.
That’s the price you take for your corn.
Now say you own a cable television company. In many towns only one cable company Section 2 A Monopolistic Market 195 11/17/05 5:27 PM Page 196 is allowed to serve a certain geographic area;
therefore, you are a monopolist. (Although
with satellite TV, the local cable company is
probably less of a monopolist than it once
was.) The cable wire has been laid across
town, and you are ready for business. What
do you charge for your cable service? The
answer is not so easy this time. No “cable television report” provides the market with
information the way a crop report does.
Thus, even though it is rather easy for firms to
determine their selling prices in perfectly
competitive markets, price determination is
not so easy in monopolistic markets. Is the Sky the Limit for the
Suppose a pharmaceutical company
recently invented a new medicine that cures
arthritis. With respect to this medicine, the
pharmaceutical company is a monopolist; it is
the only seller of a medicine that has no close
substitutes. Can the pharmaceutical company
charge any price it wants for the medicine? For
example, can it charge $5,000 for one bottle
(24 pills) of medicine? If your answer is yes,
ask yourself whether the company can charge
$10,000 for one bottle. If your answer is still
yes, ask yourself whether the company can
charge $20,000 for one bottle.
The purpose of these questions is to get
you to realize that monopolists do face a
limit as to how high a price they can charge.
The sky is not the limit. At some high prices
in our example, no one, not even someone
who suffers greatly from arthritis pain, is
willing to buy the medicine.
The monopolist is limited by the “height”
of the demand curve it faces. What do we
mean by the “height” of the demand curve?
Suppose the demand curve in Exhibit 8-1 is
the demand curve for the medicine that
cures arthritis and that the pharmaceutical
company has decided to produce 500,000
bottles of medicine. As you can see, the highest price (per bottle) that can be charged for
each bottle of 500,000 bottles is determined
by the height of the demand curve, $100 per
bottle. The sky is not the limit; the height of
the demand curve (at the quantity of output
the firm wants to sell) is the limit.
196 Chapter 8 Competition and Markets A Monopoly Seller Is Not
Most people think that if a firm is a
monopoly seller, it is guaranteed to earn
profits. This assumption is not true, however; no monopoly seller is guaranteed profits. A firm earns profits only if the price it
sells its good for is...
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- Winter '14