Lecture 16-Monopoly

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1 Aug 2010
School
Department
Course
Professor
Monopoly
Definition:
Single Seller (of product with no close substitutes)
Barriers to entry
(1) legal barriers (legal monopoly)
- post office (first class mail)
- patents
(2) natural barriers (natural monopoly)
Occurs when one firm can supply entire market at lower average cost than
two or more firms Ù economies of scale over the relevant range
Natural Monopoly Example: Pipeline
One firm can produce for entire market at lower cost than 2 or more firms
High fixed costs (pipeline) plus low marginal cost (maintaining pipeline)
=> ATC falls over relevant range
Natural Monopoly
1. Economies of scale (declining ATC) = barrier to entry
2. If monopolist (say, gas pipeline) is making economic profits, will new firm enter?
NO.
2nd firm would have higher ATC (as would 1st firm) if market is shared
**Past Tests 2 posted on site
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