Monopoly

1. Monopoly

2. Monopoly • A monopoly is one business firm that produces the entire market supply of a particular good or service.

3. Monopoly Profits • Total profit equals profit per unit times the number of units produced.

4. Monopoly vs. Competitive Industries • A monopolist produces less and charges a higher price than a competitive industry.

5. Threat of New Businesses • A monopoly attains higher prices and profits by restricting production. • The threat of new businesses does not affect a monopolist due to high barriers to entry.

6. Barriers to New Businesses • Patent Protection • Legal Harassment • Exclusive Licensing • Bundled Products • Government Franchises

7. Patent Protection • A patent is a government grant of exclusive ownership of an innovation. • A patent is a source of monopoly power. • Polaroid’s patents forced Kodak out of the instant-photography business.

8. Legal Harassment • Suing potential new businesses can deter entry into an industry. • Lengthy legal battles are so expensive that the threat of legal action may deter entry into a monopolized market.

9. Exclusive Licensing • Lack of a license makes it difficult for potential competitors to acquire the factors of production they need.

10. Bundled Products • Forcing consumers to purchase complementary products discourages competition. • Bundling products makes it difficult for competitors to sell their products profitably: • Microsoft bundles software applications with its Windows operating systems.

11. Government Franchises • A monopoly granted by a government license: • These include local power, telephone, and cable TV companies. • Another example is the U.S. Postal Service in providing first-class mail.

12. Competition vs. Monopoly • In competition, as well as monopoly, high prices and profits signal consumers’ demand for more production. • In competition, the high profits attract new suppliers. • In monopoly, barriers to new businesses are erected to exclude potential competition.

13. Competition vs. Monopoly • In competition, average costs of production approach their minimum. • In monopoly, average costs are not necessarily at or near a minimum.

14. Competition vs. Monopoly • In competition, the profit squeeze pressures businesses to reduce costs or improve product quality. • In monopoly, there is no profit squeeze to pressure the business to reduce costs or improve product quality.

15. WHAT Gets Produced • There is a basic tendency for monopolies to inhibit economic growth. • There is no pressure to produce at minimum average cost.

16. FOR WHOM • Higher prices charged by monopolists favor purchases by higher-income consumers. • Monopolists get fat profits and thus access to more goods and services.

17. HOW • Monopolists have less of an incentive to innovate. • They can continue to make profits with existing equipment and technology. • There is a tendency to inhibit technological improvement by keeping competition out of the market.

18. Any Redeeming Qualities? • Despite the strong and general case to be made against monopoly, monopolies could also benefit society.

19. Research and Development • In principle, monopolies have a greater ability to pursue research and development. • They have the resources available to invest in expensive research and development.

20. Research and Development • Monopolies have no clear incentive for invention and innovation. • They can continue to make profits by maintaining market power.

21. Entrepreneurial Incentives • The promise of even greater profits is a strong incentive for monopolies to innovate. • Innovators also have the ability to earn large profits.

22. Potential Competition • Potential competition is a threat even to monopolies. • This may cause them to behave more competitively. • The experience with the Model T suggests that potential competition can force a monopoly to change its ways.