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Pure Monopoly: Characteristics, Barriers, and Economic Effects, Exams of Business Accounting

Applied Science University (ASU)Business Accounting

An overview of pure monopolies, their characteristics, barriers to entry, and economic effects. It includes examples of industries and companies that exhibit monopoly or near-monopoly power, as well as discussions on legal and natural barriers to entry, monopolist pricing strategies, and the economic implications of monopolies.

Typology: Exams

2021/2022

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2/13/2009
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ECON202
Chapter22
PureMonopoly
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ECON 202

Chapter 22 Pure Monopoly

Pure Monopoly

  • Exists when a single firm is the sole producer of a product for which there are no close substitutes.
  • There are a number of products where the producers have a substantial amount of monopoly power and are called “near” monopolies.

Pure Monopoly ‐ Characteristics

  • Single seller One firm is the sole producer of a specific good or service. Firm and industry are synonymous.
  • No close substitutes for the firm’s product. Those who don’t buy “do without”.
  • Firm is a “price maker,” that is, the firm has control over the price because it controls quantity supplied.

Pure Monopoly – More Characteristics

• Blocked Entry into the industry.

(economic, technical, legal, barriers,

etc.))

• Non‐Price Competition A monopolist

may or may not engage in non‐price

competition. Depending on the

nature of its product, a monopolist

may advertise.

Examples of pure monopolies and

“near monopolies”:

  • Public utilities —gas, electric, water, cable TV, and local telephone service companies—are pure monopolies.
  • First Data Resources (Western Union), and the DeBeers diamond syndicate are examples of “near” monopolies. (See Last Word.)

More Examples

  • Professional sports leagues – are sole

providers of specific service in large area

(Braves in the South).

  • Monopoliesp mayy be ggeographic g p. A small

town may have only one airline, bank,

etc.

  • Manufacturing monopolies are virtually

nonexistent in nationwide U.S.

manufacturing industries.

Legal Barriers to Entry

  • Patents grant the inventor the exclusive right to produce or license a product (20 years); this exclusive right can earn profits for future research which results in more patents andresearch, which results in more patents and monopoly profits.
  • Licenses Radio and TV stations (issued by: FCC) , taxi companies are examples of government granting licenses where only one or a few firms are allowed to offer the service.

Ownership or control of essential

resources is another barrier to

entry.

  • International Nickel Co. of Canada (now called Inco) controlled about 90 percent of the world’s nickel reserves, and DeBeers of South Africa controls most of the world’s diamond supplies (see Last Word).

Ownership – Barrier to entry

  • Aluminum Co. of America once

controlled all basic sources of bauxite,

the ore used in aluminum fabrication.

  • Professional sports leagues control player

contracts and leases on major city

stadiums.

Monopolists use pricing or other strategic barriers such as selective price‐cutting and advertising.

  • Dentsply, manufacturer of false teeth , controlled about 70 percent of the market. In 2005 Dentsply was found to have illegally prevented distributors from carryingprevented distributors from carrying competing brands.
  • Microsoft charged higher prices for its Windows operating system to computer manufacturers featuring Netscape Navigator instead of Microsoft’s Internet Explorer. U.S. courts ruled this action illegal.

Monopoly demand is the industry (market) demand and is therefore downward sloping.

  • Analysis of monopoly demand makes three assumptions: 1. The monopoly is secured by patents, economies of scale, or resource ownership. 2. The firm is not regulated by any unit of government. 3. The firm is a single‐price monopolist; it charges the same price for all units of output.

The monopolist is a price maker.

  • The firm controls output and price but is not free of market forces, since the combination of output and price that can be sold depends on demandon demand.
  • Firms with downward sloping demand curves are Price Makers.

Misconceptions about monopoly

prices

  • Although Monopolists likely make greater profits than they would in pure competition, they are not guaranteed a profit. They are not immune to changesg in tastes,, economic effects, escalating resource prices, etc.
  • Faced with continuing loses, monopolists will choose to do something else with their resources.

Economic effects of monopolies

  • Monopolies don’t operate at maximum efficiency in regard to resources and production. They pick the level where they can make the most money.y
  • So usually monopolies result in an under‐ allocation of resources. Restricting output and charging higher prices than society would expect is what usually makes people upset.
    • Income distribution is more unequal than it would be under a more competitive situation.
    • The effect of the monopoly power is to

Economic effects of monopolies

transfer income from the consumers to the business owners. 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.

Cost complications may lead to

other conclusions.

  • Economies of scale ‐ Where there are huge economies of scale, market demand may not be big enough to support a large number of companies so a monopoly might be the onlycompanies, so a monopoly might be the only way to provide the product to consumers.
  • Inefficiency may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs.

Cost complications may lead to

other conclusions.

  • Rent‐seeking behavior often occurs as monopolies seek to acquire or maintain government‐granted monopoly privileges. There is a great desire by firms to obtain theseThere is a great desire by firms to obtain these privileges because of the long‐term profits available.

Technological progress and dynamic

efficiency may occur in some monopolistic

industries but not in others.

  • Some monopolies show little interest in technological progress.
  • On the other hand, research can lead to lower unit costs, which help monopolies as much as any other type of firm. Also, research can help the monopoly maintain its barriers to entry against new firms.

Examples of price discrimination:

  • Airlines charge high fares to executive travelers (inelastic demand) than vacation travelers (elastic demand).
  • Electric utilities frequently segment their markets by end uses, such as lighting and heating. (Lack of substitutes for lighting makes this demand inelastic).

More examples – Price Discrimination

  • Long‐distance phone service has higher rates during the day, when businesses must make their calls (inelastic demand), and lower rates at night and on week‐ends, when less important calls are made.
  • Movie theaters and golf courses vary their charges on the basis of time and age.
  • International trade has examples of firms selling at different prices to customers in different countries.

Legal?

• Price discrimination is common, and

only illegal when the firm is using it

to lessen or eliminate competition.p

Regulated Monopoly

  • Occurs where a natural monopoly or economies of scale make one firm desirable.
  • As a result of changes in technology and deregulation in the local telephone and the electricity‐providers industry, some states are allowing new entrants to compete in previouslyallowing new entrants to compete in previously regulated markets (pg 439)
  • In those markets that are still regulated, a regulatory commission may attempt to establish the legal price for the monopolist that is equal to marginal cost at the quantity of output chosen. This is called the “socially optimal price.” (See Figure 22.9)

End Chapter 22