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Economics

In this chapter, look for the answers to these questions:

• Why do monopolies arise? • Why is MR < P for a monopolist? • How do monopolies choose their P and Q? • How do monopolies affect society’s well-being? • What can the government do about monopolies? • What is price discrimination?

© 2007 Thomson South-Western

© 2007 Thomson South-Western

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.

WHY MONOPOLIES ARISE
• The fundamental cause of monopoly is barriers to entry. • 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.

• In this chapter, we study monopoly and contrast it with perfect competition. • The key difference: A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.
© 2007 Thomson South-Western

© 2007 Thomson South-Western

Monopoly Resources • Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.
Example: DeBeers owns most of the world’s diamond mines

Government-Created Monopolies • Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. • Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.

© 2007 Thomson South-Western

© 2007 Thomson South-Western

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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. • A natural monopoly arises when there are...