These economies of scale may be the result of spreading large initial capital cost over a large number of units of output (natural monopoly) or, more recently, spreading product development costs over units of output, and a greater specialization of inputs. Following are 4 reasons why costs may differ:Įconomies of scale may result in one or two firms operating in an industry experiencing lower ATC than many competitive firms. This will result in a redistribution of income in favor of higher-income business owners, unless the buyers of monopoly products are wealthier than the monopoly owners.Ĭosts complications: Costs for monopolies may not be the same as for more competitive firms. The effect of the monopoly power is to transfer income from the consumers to the business owners. Income distribution is more unequal than it would be under a more competitive situation. Microsoft charged higher prices for its Windows operating system to computer manufacturers featuring Netscape Navigator instead of Microsoft’s Internet Explorer. In 2005 Dentsply was found to have illegally prevented distributors from carrying competing brands. Dentsply, manufacturer of false teeth, controlled about 70 percent of the market. Monopolists may use pricing or other strategic barriers such as selective price-cutting and advertising. Professional sports leagues control player contracts and leases on major city stadiums. of Canada (now called Inco) used to control about 90 percent of the world’s nickel reserves and DeBeers of South Africa controls most of the world’s diamond supply (see Last Word). Ownership or control of essential resources is another barrier to entry. Radio and TV stations and taxi companies are examples of government granting licenses where only one or a few firms are allowed to offer the service. Licenses are another form of entry barrier. Patents grant the inventor the exclusive right to produce or license a product for twenty years this exclusive right can earn profits for future research, which results in more patents and monopoly profits. Legal barriers to entry into a monopolistic industry also exist in the form of patents and licenses. Government usually gives one firm the right to operate a public utility industry in exchange for government regulation of its power. Public utilities are often natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying the entire demand. Google and Amazon both enjoy economies of scale in their respective markets. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. The Last Word examines how some Internet companies have achieved near monopoly power due to network effects and economies of scale.Įconomies of scale constitute one major barrier. Some basic issues involved in the regulation of public service monopolies are reviewed. This section ends with a discussion of the effects of monopoly power in the U.S. The case of price discrimination and its effects are discussed along with the conditions necessary for it to occur. The misconceptions about monopoly pricing behavior are presented, as well as a comparison of efficiency in pure competition and pure monopoly. Emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly. The concept of a natural monopoly is addressed in this section.īuilding on the analysis of the preceding chapter, the discussion of the price‑output decision-making by monopoly firms points out that the marginal-revenue=marginal-cost rule still applies. The discussion of barriers to entry asserts at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly. This chapter is divided into seven learning objectives: the characteristics of pure monopoly, the barriers to entry that create and protect monopolies, how demand is viewed by a monopolist, price and output determination under monopoly, the economic effects of monopoly, price discrimination, and the regulation of monopolies. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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