![]() ![]() The result is a model that gives us important insights into the nature of the choices of firms and their impact on the economy. As always with models, we make the assumptions that define monopoly in order to simplify our analysis, not to describe the real world. ![]() Such conditions are rare in the real world. In assuming blocked entry, we assume, for reasons we will discuss below, that no other firm can enter that market. In assuming there is one firm in a market, we assume there are no other firms producing goods or services that could be considered part of the same market as that of the monopoly firm. We shall see in the next chapter that monopolies are not the only firms that have this power however, the absence of rivals in monopoly gives it much more price-setting power.Īs was the case when we discussed perfect competition in the previous chapter, the assumptions of the monopoly model are rather strong. A firm that acts as a price setter possesses monopoly power The ability to act as a price setter. The entry of new firms, which eliminates profit in the long run in a competitive market, cannot occur in the monopoly model.Ī firm that sets or picks price based on its output decision is called a price setter A firm that sets or picks price based on its output decision. It selects from its demand curve the price that corresponds to the quantity the firm has chosen to produce in order to earn the maximum profit possible. In the case of monopoly, entry by potential rivals is prohibitively difficult.Ī monopoly does not take the market price as given it determines its own price. Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering. ![]() There are no close substitutes for the good or service a monopoly produces. A monopoly A firm that that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult. Monopoly is at the opposite end of the spectrum of market models from perfect competition. ![]() Define what is meant by a natural monopoly.List and explain the sources of monopoly power and how they can change over time.Define monopoly and the relationship between price setting and monopoly power.First, though, we will look at characteristics of monopoly and at conditions that give rise to monopolies in the first place. We will explore the policy alternatives available to government agencies in dealing with monopoly firms. As a result, a monopoly solution is likely to be inefficient from society’s perspective. We will show that a monopoly firm is likely to produce less and charge more for what it produces than firms in a competitive industry. Such firms continue to use the marginal decision rule in maximizing profits, but their freedom to select from the price and quantity combinations given by the market demand curve affects the way in which they apply this rule. We will find that firms that have their markets all to themselves behave in a manner that is in many respects quite different from the behavior of firms in perfect competition. As the only suppliers of particular goods or services, they face the downward-sloping market demand curve alone. Unlike the individual firms we have previously studied that operate in a competitive market, taking the price, which is determined by demand and supply, as given, in this chapter we investigate the behavior of firms that have their markets all to themselves. A single firm may provide your utilities-electricity, natural gas, and water. Your school may have granted an exclusive franchise to a single firm for food service and to another firm for vending machines. Your campus bookstore is likely to be the only local firm selling the texts that professors require you to read. If your college or university is like most, you spend a lot of time, and money, dealing with firms that face very little competition. ![]()
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