Top Banner
In brief,w hatis a m onopoly In relation to M icrosoft A copyrightfrom the G overnm entgives M icrosoftthe rightto m ake and sell copies of the W indow s operating system .So w hen w e decide to purchase a copy ofW indow s,w e have little choice butto pay the price thatthe firm charges forthe product.M icrosoftis said to have a ‘M onopoly’in the m arketforw indow s as itis used by over90% ofthe PC ’s in the w orld!A M onopoly like M icrosofthas no close com petitors and therefore can influence the m arketprice ofits product.A M onopoly firm is referred to as a ‘price m aker’. M arketPow er: Alters relationship betw een a firm ’s costs and the price atw hich itsells thatproductto the m arket. A com petitive firm takes the price ofits outputas given by the m arketand then chooses the quantity itw ill supply so that price=marginal cost. The prices thata m onopoly charges exceeds m arginal cost.This is evidentin the case ofM icrosoft’s W indow s. So,w ithouta doubt,it’s no surprise thatm onopolies charge high prices fortheir products.So w hy don’tM icrosoftcharge €500 instead of€50 fortheirsoftw are?? The answ eris sim ple-Because the higherthe price they charge,the few erpeople w ho w ill purchase theirproductatthatprice.People w ould find otheralternatives such as purchasing less com puters,changing overto otheroperating system s ortake the illegal route.. W e m ustrem em berthatm onopolies cannot actually obtain any level ofprofitthey w ish.W hy? Because higherprices resultin few ercustom ers. Below is a link on an interesting article on the issue of‘ The Microsoft Monopoly: The F acts, the Law and the R emedy’. http://w w w .pff.org/issues-pubs/pops/pop7.4m icrosoftm onopolyfacts.htm l
7
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Monopoly Slides

In brief, what is a monopoly In relation to Microsoft

A copyright from the Government gives Microsoft the right to make and sell copies of the Windows operating system. So when we decide to purchase a copy of Windows, we have little choice but to pay the price that the firm charges for the product. Microsoft is said to have a ‘Monopoly’ in the market for windows as it is used by over 90% of the PC’s in the world! A Monopoly like Microsoft has no close competitors and therefore can influence the market price of its product. A Monopoly firm is referred to as a ‘price maker’.

Market Power: Alters relationship between a firm’s costs and the price at which it sells that product to the market. A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price=marginal cost. The prices that a monopoly charges exceeds marginal cost. This is evident in the case of Microsoft’s Windows. So, without a doubt, it’s no surprise that monopolies charge high prices for their products. So why don’t Microsoft charge €500 instead of €50 for their software?? The answer is simple- Because the higher the price they charge, the fewer people who will purchase their product at that price. People would find other alternatives such as purchasing less computers, changing over to other operating systems or take the illegal route.. We must remember that monopolies cannot actually obtain any level of profit they wish. Why? Because higher prices result in fewer customers.

Below is a link on an interesting article on the issue of ‘The Microsoft Monopoly: The Facts, the Law and the Remedy’. http://www.pff.org/issues-pubs/pops/pop7.4microsoftmonopolyfacts.html

Page 2: Monopoly Slides

Why monopolies arise?

Monopoly: A firm that is the sole seller of a product without close substitutes. Firms are said to have a monopoly power if they are a dominant seller in the market and can exert some control over the market because of this. The fundamental cause of a monopoly is ‘’barriers to entry’’: a monopoly stays the only seller in its market as other firms cannot enter/compete with it. Barriers to entry have four main sources:

Barriers To Entry

Key research owned by single firm

Government gives a firm the exclusive right to produce some good/service

Costs of production make a single producer more efficient than large numbers of producers

A firm can gain control of other firms in the market and therefore grow in size

Page 3: Monopoly Slides

Monopoly Resources

Firm owning a key resource

Example- owner of a well has a monopoly on water

Monopolists have much greater market power than single firms in competitive markets Monopolists can

charge high price for necessities like water

Exclusive ownership of a key resource is potential cause of a monopoly

Monopolies rarely arise because if this

There are few examples of firms that own a resource that has no close substitutes

Government created

monopolies

Monopolies happen as Government has given one person/firm the right to sell a good/service

Patent/Copyright laws are used by Government to create a monopoly to serve public interest

Eg:Pharmaceutical companies applying for a patent

European Kings used to grant exclusive licences to friends and allies to raise money

Governments can grant a monopoly as it’s viewed to be in the public interest.

In Sweeden-can control directly the sale of alcohol

Patents/Copyrights give 1 producer a monopoly

Higher prices occur

Privatization of alcohol would result in fatal accidents, suicides etc.

Laws on patents/copyrights have benefits and costs

Page 4: Monopoly Slides

Natural Monopolies

As markets expand, a natural monopoly can evolve into a competitive market.

Distribution of water

Pipes must be built by a firm in the town

Average costs of water are lowest if only 1 firm serves the entire market.

Economies of scale over range of output

A firm can produce a large amount of output at a low cost

An industry is a natural monopoly when a single firm can supple a good/servide to an entire market

Firms less concerned about new entrants which may threaten its monopoly power Monopolist’s profit

attracts new entrants into market

Market becomes more competitive

External Growth

Large firms grown partly through takeovers/merging and acquisitions

Industry becomes more concentrated

Firm may develop monopoly power over their rivals + use barriers to make it difficult for new firms to enter

Governments monitor acquisitions to notice any implications for competitions.

Example: In UK, any merger that gives a firm 25% or more of market may be investigated

Page 5: Monopoly Slides

Monopoly Vs Competition:

The main difference between a competitive firm and a monopoly is the ability the monopoly has to influence the price of its output. Competitive firms are small relative to the market in which it operates so it takes the price of its output as given by the market conditions. In contrast, because a monopoly is the sole producer in its market, it can change the price of its goods by altering the quantity it supplies to the market.

The following video link below describes what a monopoly is in simple terms and also the problems associated with it.

http://www.youtube.com/watch?v=b93mTVukuiE&feature=related

Page 6: Monopoly Slides

A Monopoly’s Revenue: Total Revenue = Quantity sold × Price Average Revenue = Total Revenue ÷ Quantity of output Marginal Revenue: A monopolists marginal revenue is always less than the price of its good and very different from marginal revenue for competitive firms. When a monopoly increases the quantity it sells, it has two effects on total revenue: more output is sold and the price falls.

Profit Maximization: How exactly do monopolistic firms maximize their profit? - They maximize profit by choosing the quantity at which marginal revenue equals marginal cost.

The Welfare Cost of Monopoly: A monopoly charges a price above marginal cost. This makes monopoly undesirable to consumers. The monopoly earns a profit from charging this higher price. This makes it desirable to the owners of the firm. A consumer surplus is consumers’ willingness to pay for a good minus how much they actually pay for it.

Page 7: Monopoly Slides

Examples of Monopolies: Iarnrod Eireann

Microsoft

American Telephone & Telegraph

Major League Baseball

Telkom Long Island Power Authority