Chapter 10 - Challenge to market effectiveness 1: Monopolies. After reading this chapter, you should be able to answer the following questions: What is monopoly? What are the barriers to entry? How is the demand curve for a monopoly? How does a monopoly decide quantity of output to produce? What are the social costs of monopoly? What is price discrimination? | Chapter 10 Challenge To Market Effectiveness 1: Monopolies McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is monopoly? What are the barriers to entry? How is the demand curve for a monopoly? How does a monopoly decide quantity of output to produce? What are the social costs of monopoly? What is price discrimination? 10- Monopoly A pure monopoly is a firm without any competition. Pure monopolies do not exist in the real world. The fewer the substitutes there are for a firm’s products, the more monopolistic the firm is. A monopolist can earn long term profits if it keeps other firms from entering its market. Entry barriers stop firms from entering a market and destroying monopoly profits. 10- Barriers To Entry The Government: Licenses: By limiting entry licenses allow members of protected professions to earn monopoly profits, . teachers, lawyers. Outlawing competition: Government can outlaw . | Chapter 10 Challenge To Market Effectiveness 1: Monopolies McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is monopoly? What are the barriers to entry? How is the demand curve for a monopoly? How does a monopoly decide quantity of output to produce? What are the social costs of monopoly? What is price discrimination? 10- Monopoly A pure monopoly is a firm without any competition. Pure monopolies do not exist in the real world. The fewer the substitutes there are for a firm’s products, the more monopolistic the firm is. A monopolist can earn long term profits if it keeps other firms from entering its market. Entry barriers stop firms from entering a market and destroying monopoly profits. 10- Barriers To Entry The Government: Licenses: By limiting entry licenses allow members of protected professions to earn monopoly profits, . teachers, lawyers. Outlawing competition: Government can outlaw competition to a monopolist . . post office. State religion: Government can create religious monopolies. 10- Barriers To Entry Unions: Unions are organization of workers. Unions engage in collective bargaining with employers. Control of a vital resource: Firms can maintain a monopoly by controlling a vital resource, . silk in ancient China, alum in Ottoman empire. 10- Barriers To Entry Incompatibility: By making its products incompatible with the complementary goods of its rival, a firm can create and maintain its monopoly. Software: Incompatibility-based barriers to entry are a prime source of Microsoft’s riches. Sports leagues: Incompatibility provides a strong barrier to entry, protecting all professional sports leagues. 10- Barriers To Entry Economies of scale: If in an industry average total costs decrease as output increases, then a new firm’s costs are extremely high compared to the monopolist’s costs. In industries with significant economies of scale, it
