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Prof. Ana Corrales ECO 2023 Notes
Ch. 24: Pure Monopoly
Characteristics A single firm is the sole producer or supplier (firm =
industry) There are no close substitutes Monopolist controls the total quantity supplied and
price “price maker” Monopolist has no immediate competitors b/c barriers
keep them from entering Nonprice competition: Product may be standardized
or differentiated
Prof. Ana Corrales ECO 2023 Notes
Barriers to Entry
Economies of Scale Modern technologies allows for extensive Economies of Scale A firm’s L-R ATC will decline over the output range
Legal Barriers: Patents & Licenses Patents: Exclusive right of inventor to use the invention Licenses: Government limits entry to industry or occupation
through licensing Ownership/Control of Essential Resources
A firm can prohibit entry of rival firms Pricing/Other Strategic Barriers
Monopolist can create an entry barrier by cutting price, increasing advertising or other strategic action making it very difficult for new entrant to succeed
Prof. Ana Corrales ECO 2023 Notes
Natural Monopoly
An industry in which economies of scale are so great that a single firm can produce the product at a lower ATC than if more than one firm produced the product
Prof. Ana Corrales ECO 2023 Notes
Policy Options
If the monopoly is achieved & sustained through anti-competitive actions, creates substantial economic inefficiencies, and appears to be long-lasting, the government can file charges against the monopoly under anti-trust laws
If the monopoly is a natural monopoly, society can allow it to continue to expand. If no competition arises, government may regulate its prices and operations
If monopoly is unsustainable over the long-run, society can ignore it
Prof. Ana Corrales ECO 2023 Notes
Price Discrimination
The practice of selling a specific product at more than one price when the price differences are not justified by cost differences
Conditions Monopoly power: The seller must possess the ability to control
output and price Market segregation: At a relatively low cost, the seller must be
able to segregate buyers into distinct classes, each of which has a different willingness/ability to pay for product
No resale: The original purchaser cannot resell the product/service
Prof. Ana Corrales ECO 2023 Notes
Examples of Price Discrimination Airline industry charges different fares to
business v. leisure travelers Movie ticket prices vary by age, military
service, time movie is shown Tickets to professional sporting events
vary by age (baseball) International Trade
Prof. Ana Corrales ECO 2023 Notes
Last Word
De Beers’ Diamonds: Are Monopolies Forever?Page 456
Prof. Ana Corrales ECO 2023 Notes
Ch. 24 Study Questions
2 10 13
