2. Monopoly Outline Pure monopoly Barriers to entry Monopoly compared to competition Natural monopoly The regulatory dilemma Monopolistic competition Pirated from: www.clt.astate.edu/crbrown/chapter9a.ppt

3. Pure monopoly A “pure” monopoly is a market structure in which a single seller accounts for 100 percent of market sales.

4. Pure monopolies are hard to find in the real world. Economists and judges as a rule believe a 90 percent market share is sufficient to constitute an “effective” monopoly.

5. Figure 9.1

6. Notice the monopolist earns an economic profit equal to the shaded area. Question is: Should this situation not be ripe for entry of new firms? Not if there are factors which impede entry of new firms.

7. Barriers to entry: 2 definitions 1.“[A]nything which creates a disadvantage for potential entrants vis à vis established firms. The height of the barriers is measured by the extent to which, in the long run, established firms can elevate their selling prices above minimal average cost... without inducing potential entrants to enter” [Joe Bain, Industrial Organization, 2 nd ed., p. 252]. 2.Barriers to entry into a market... can be defined to be socially undesirable limitations to entry of resources which are due to protection of resource owners already in the market” [Christian von Weizsäcker, Barriers to Entry, p. 13].

8. Examples of barriers to entry Absolute cost advantages Examples: Alcoa had access to low cost hydroelectric power in Pacific NW; Weyerhauser procured extraction rights to tracts of Douglas fir in 1901; International petroleum majors (Texaco, SOCAL, BP, et al) formed a pipeline consortium in California. Economies of scale: Dominant firm may enjoy cost advantages due to realization of scale economies in production, distribution, capital raising, or sales promotion.

9. Barriers due to control of wholesale, retail distribution systems Examples: Control of wholesale diamond distribution by DeBeers; Control of advantageous retail shelf space by Proctor and Gamble, Kellogs. Barriers due to patents, copyrights, trademarks, and other legal barriers Examples: Xerox’s patent on xerography; Polaroid’s patent on instamatic photography Barriers due to product differentiation/brand power Examples: Cigarettes, pain relievers, designer jeans, athletic wear, batteries, soft drinks

10. Strategic Barriers Alcoa’s restrictive covenants with hydroelectric suppliers. Standard Oil’s “secret rebate” policy with the railroad companies. “Lease-only” policy of IBM, United Shoe Machinery, International Salt IBM’s continual design modification was designed to forestall entry of firms such as Calcomp that marketed plug-compatible peripherals—e.g.,tapes and line printers. Microsoft charges PC makers a royalty for every computer shipped—regardless of whether the machine has a Windows operating system installed. Microsoft requires that Explorer icon appear on desktop in initial boot up sequence.

11. Output 0 PMPM PCPC QMQM QCQC MC = AC Market Demand MR A B EH Price, Cost Monopoly compared to Competition Notice that for each additional unit produced between Q M and Q C, Demand (marginal benefit) is higher than marginal cost.

12. PriceQuantityEcon  Consumer Surplus Dead Weight Comp- etition PCPC QCQC zeroP C AEzero Monopoly PMPM QMQM P C P M BHP M ABBHE Results summarized

13. Dead weight is a measure of loss due to resource misallocation—it is equal to the surplus lost to consumers which is not captured by the producer.