15 monopoly.pdf

Chapter 15 Monopoly Monopoly ? While a competitive firm is a price taker, a monopoly firm is a price maker. ? A firm is considered a monopoly if . . . ? it is the sole seller of its product. ? its product does not have close substitutes. 15.1 WHY MONOPOLIES ARISE ? The fundamental cause of monopoly is barriers to entry. 15.1 WHY MONOPOLIES ARISE ? Barriers to entry have three sources: ? Ownership of a key resource. ? The government gives a single firm the exclusive right to produce some good. ? Costs of production make a single producer more efficient than a large number of producers. 1. Monopoly Resources ? Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason. 2. Government-Created Monopolies ? Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. 2. Government-Created Monopolies ? Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. 3. Natural Monopolies ? An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. 3. Natural Monopolies ? A natural monopoly arises when there are economies of scale over the relevant range of output. Figure 1 Economies of Scale as a Cause of Monopoly Copyright ? 2004 South-Western Quantity of Output Average total cost 0 Cost 3. Natural Monopolies ? Some goods that are excludable but not rival. ? When a firm is a natural monopoly, it is less concerned about new entrants eroding its monopoly. ? In some cases, the size of the market is one determinant of whether an industry is a natural monopoly. ? As a market expands, a natural monopoly can evolve into a competitive market. 15.2 HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS ? 1. Monopoly versus Competition