Chapter 14 (2) Flashcards
We can see how the forces of competitions = usually stacked against any one firm gaining that much market power
►After all, when a firm = charges high prices in a competitive market –> some other enterprising firm will generally come along charging a lower price
► In a monopoly situation, such as the diamond market –> other firms could make profits by entering the market & undercutting the monopolist’s high prices
So why isn’t everyone doing it?
the key characteristic of a monopoly market is that there are barriers that prevent firms other than the monopolist from entering the market
►The barriers = allow the monopolist to set prices & quantities w/out fear of being undercut by competitors
► Barriers TO ENTRY contradict the FREE ENTRY & EXIT FEATURE that characterizes perfectly competitive markets
(4) Barriers to entry:
► Scarce resources
►Economies of scale
►Gov’t intervention
►Aggressive business tactics on the part of market-leading firms
SCARCE RESOURCES
►Ex: if a new firm = owns all the diamond mines, it has control of the production process
sometimes a single country, rather than a single firm = controls scarce resources w/ no close substitutes
►When this happens: economic policy issues = can become entangled in diplomatic
ECONOMIES OF SCALE
► when a firm produces more output –> its average costs go down.
►In some industries –> economies of scale = so power that competition between two/more firms simply doesn’t make sense
In these cases, the required infrastructure = too much to replicate
► Electricity supply = an example of a natural monopoly
NATURAL MONOPOLY
a market in which a single firm = cam produce –> at a lower cost than multiple firms –> the entire quantity of output demanded
Examples of Monopoly
►Drinking-water supplies
► Natural gas
►Public transport (railways)
►These depend on a network of pipes that would be immensely expensive for new market entrants to duplicate
NATURAL MONOPOLY: comes from the fact that, paradoxically
►monopoly = can be a “natural” outcome of competitive forces
► Doesn’t have to worry about new firms entering the market to compete
► Other firms = have no incentive to enter –> b/c they would face higher costs of production that the monopoly
–> Thus, high fixed costs = create an effective barrier to entry
►Governments = often get involved in natural monopolies to try to protect the public from abuse of monopolistic power Thus, high fixed costs = create an effective barrier to entry
GOVERNMENT INTERVENTION
►Governments = may create/sustain monopolies where they would not otherwise exist
○ In come cases: critics wonder if the real reason = to use monopoly power to benefit insiders
Sometimes governments create monopoly power for state-owned firms
They can do this through a legal prohibition against other firms entering the market
►Or, by subsidizing a state-owned enterprise so heavily that private companies effectively cannot compete
Not all state-owned enterprises = monopolies
○ Example: some governments own airplanes that compete against privately owned airlines
Governments can also create/support private monopolies through regulation of intellectual property
Patents & copyrights = give people who invent/create something the exclusive right to produce & sell it for a given period of time
►Example: by forbidding the use of a chemical formula by other manufacturers –> patents allow pharmaceutical companies to act temporarily as monopolists in the market for a particular drug
○ This allows the patent holder to earn higher profits
►When the patent expires –> government protection of the monopoly ends
○ Competitors can then drive down prices by producing a generic version of the same drug
