ECN 104 Chapter Notes - Chapter 8: Monopoly Price, Natural Monopoly, Marginal Revenue

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13 Jun 2011
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Chapter 8: Monopoly
8.1 Characteristics of Monopoly
An industry in which one firm is the sole producer (seller of a product/service for which no close
substitutes exist
Single seller: the firm & industry are synonymous
No close substitutes: product is unique
Price-maker: controls total quantity supplied, has considerable control over price; can change price by
changing production quantity; can sell a much/little as it wants
Blocked entry: certain barriers keep potential competitors from entering industry
Non price competition: product produced may be standardized (natural gas, electricity) engage mainly
in public relations advertising or differentiated (windows, Frisbees) sometimes advertise products
attributes
Barriers to Entry
Anything that artificially prevents the entry of firms into an industry
Strong barriers effectively block all potential competition; weaker barriers permit oligopoly & entry of
competing firms
Economies of Scale (natural monopoly)
Single firm can supply good/service to entire market at smaller cost than two+ firms
Aries when there is economies of scale over relevant range of output
When ATC declines, least-cost production is realized
Legal Barriers: Patents & Licenses
Patents: exclusive right of an inventor to use/allow another to use their invention; protect
inventory from rivals, provide a monopoly position for life of patent
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Licenses: limiting entry into an industry/occupation
Ownership /Control of Essential Resources
Use of private property as an obstacle to rivals
Owns/controls a key resource essential to production process can prohibit entry of rival firms
Pricing and Other Strategic Barriers
Entry may be blocked by the response of monopolist to entry attempts by rivals
Create entry barrier by cutting its price, stepping up advertising, actions to make it difficult
for entrant to succeed
Monopoly Demand
Status is secured
Firm is not governmentally regulated
Firm is a single price monopolist: firm changes the same price for all units
Marginal revenue is less than price:
Can increase sales only by charging lower price
Monopolist is a Price – Maker:
Firms with downward sloping demand curves
Monopolist sets price in elastic region of demand
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