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

MonopolyMonopoly

MonopolyMonopoly

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

Monopoly ProfitsMonopoly Profits

Total profit equals profit per unit Total profit equals profit per unit times the number of units produced.times the number of units produced.

Monopoly vs. Monopoly vs. Competitive IndustriesCompetitive Industries

A monopolist produces A monopolist produces lessless and and charges a charges a higherhigher price than a price than a competitive industry.competitive industry.

Threat of New BusinessesThreat of New Businesses

A monopoly attains higher prices and A monopoly attains higher prices and profits by restricting production.profits by restricting production.

The threat of new businesses does The threat of new businesses does notnot affect a monopolist due to high affect a monopolist due to high barriers to entry.barriers to entry.

Barriers to New BusinessesBarriers to New Businesses

Patent ProtectionPatent Protection Legal HarassmentLegal Harassment Exclusive LicensingExclusive Licensing Bundled ProductsBundled Products Government FranchisesGovernment Franchises

Patent ProtectionPatent Protection

A A patentpatent is a government grant of is a government grant of exclusive ownership of an innovation.exclusive ownership of an innovation.

A patent is a source of monopoly A patent is a source of monopoly power.power. Polaroid’s patents forced Kodak out of Polaroid’s patents forced Kodak out of

the instant-photography business.the instant-photography business.

Legal HarassmentLegal Harassment

Suing potential new businesses can Suing potential new businesses can deter entry into an industry.deter entry into an industry.

Lengthy legal battles are so Lengthy legal battles are so expensive that the expensive that the threatthreat of legal of legal action may deter entry into a action may deter entry into a monopolized market.monopolized market.

Exclusive LicensingExclusive Licensing

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

Bundled ProductsBundled Products

Forcing consumers to purchase Forcing consumers to purchase complementary products discourages complementary products discourages competition.competition.

Bundling products makes it difficult Bundling products makes it difficult for competitors to sell their products for competitors to sell their products profitably:profitably: Microsoft bundles software applications Microsoft bundles software applications

with its Windows operating systems.with its Windows operating systems.

Government FranchisesGovernment Franchises

A monopoly granted by a A monopoly granted by a government license:government license: These include local power, telephone, These include local power, telephone,

and cable TV companies. and cable TV companies. Another example is the U.S. Postal Another example is the U.S. Postal

Service in providing first-class mail.Service in providing first-class mail.

Competition vs. MonopolyCompetition vs. Monopoly

In competition, as well as monopoly, In competition, as well as monopoly, high prices and profits signal high prices and profits signal consumers’ demand for more consumers’ demand for more production.production.

In competition, the high profits In competition, the high profits attract new suppliers.attract new suppliers.

In monopoly, barriers to new In monopoly, barriers to new businesses are erected to exclude businesses are erected to exclude potential competition.potential competition.

Competition vs. MonopolyCompetition vs. Monopoly

In competition, average costs of In competition, average costs of production approach their minimum.production approach their minimum.

• In monopoly, average costs are In monopoly, average costs are notnot necessarily at or near a minimum.necessarily at or near a minimum.

Competition vs. MonopolyCompetition vs. Monopoly

In competition, the profit squeeze In competition, the profit squeeze pressures businesses to reduce costs pressures businesses to reduce costs or improve product quality.or improve product quality.

• In monopoly, there is no profit In monopoly, there is no profit squeeze to pressure the business to squeeze to pressure the business to reduce costs or improve product reduce costs or improve product quality.quality.

WHAT Gets ProducedWHAT Gets Produced

There is a basic tendency for There is a basic tendency for monopolies to inhibit economic monopolies to inhibit economic growth. growth.

There is no pressure to produce at There is no pressure to produce at minimum average cost.minimum average cost.

FOR WHOM FOR WHOM

Higher prices charged by Higher prices charged by monopolists favor purchases by monopolists favor purchases by higher-income consumers. higher-income consumers.

Monopolists get fat profits and thus Monopolists get fat profits and thus access to more goods and services.access to more goods and services.

HOW HOW

Monopolists have less of an incentive Monopolists have less of an incentive to innovate.to innovate. They can continue to make profits with They can continue to make profits with

existing equipment and technology.existing equipment and technology. There is a tendency to inhibit There is a tendency to inhibit

technological improvement by keeping technological improvement by keeping competition out of the market. competition out of the market.

Any Redeeming Qualities? Any Redeeming Qualities?

Despite the strong and general case Despite the strong and general case to be made against monopoly, to be made against monopoly, monopolies could also benefit monopolies could also benefit society.society.

Research and DevelopmentResearch and Development

In principle, monopolies have a In principle, monopolies have a greater ability to pursue research greater ability to pursue research and development. and development. They have the resources available to They have the resources available to

invest in expensive research and invest in expensive research and development. development.

Research and Development Research and Development

Monopolies have no clear incentive Monopolies have no clear incentive for invention and innovation.for invention and innovation.

• They can continue to make profits by They can continue to make profits by maintaining market power.maintaining market power.

Entrepreneurial Incentives Entrepreneurial Incentives

The promise of even greater profits is The promise of even greater profits is a strong incentive for monopolies to a strong incentive for monopolies to innovate. innovate.

Innovators also have the ability to Innovators also have the ability to earn large profits.earn large profits.

Potential CompetitionPotential Competition

Potential competition is a threat even Potential competition is a threat even to monopolies.to monopolies.

This may cause them to behave This may cause them to behave more competitively. more competitively.

The experience with the Model T The experience with the Model T suggests that potential competition suggests that potential competition can force a monopoly to change its can force a monopoly to change its ways.ways.