Tài liệu Microeconomics for MBAs 39 pdf

Chapter 12 Monopoly Power and Firm

Pricing Decisions

The essential condition for competition is freedom of market entry. In perfect

competition entry is assumed to be completely free. Conversely, the essential condition

for monopoly is the presence of barriers to entry. Monopolists can manipulate price

because such barriers protect them from being undercut by rivals.

Barriers to entry can arise from several sources.

· First, the monopolist may have sole ownership of a strategic resource, such as

bauxite (from which aluminum is extracted).

· Second, the monopolist may have a patent or copyright on the product, which

prevents other producers from duplicating it. For years, Polaroid had a patent

monopoly on the instant-photograph market. (Eastman Kodak developed an

alternative process, but was forced to withdraw its camera from the market

when a Federal court ruled that it infringed on Polaroid’s patent.)

· Third, the monopolist may have an exclusive franchise to sell a given product

in a specific geographical area. Consider the exclusive franchise enjoyed by

your local telephone company, or was enjoyed, until very recently, your local

electric utility.

· Fourth, the monopolist may own the rights to a well-known brand name with a

highly loyal group of customers. In that case, the barrier to entry is the costly

process of trying to get customers to try a new product.

· Finally, in a monopolized industry, production may be conducted on a very

large scale, requiring huge plants and large amounts of equipment. The

enormous financial resources needed to produce on such a scale can act as a

barrier to entry, because a new entrant operating on a small scale would have

costs too high to compete effectively with the dominant firm.

All in all, these external barriers to entry can be thought of as costs that must be

borne by potential competitors before they can complete. Such barriers may be “low,”

which means that a sole producer’s monopoly power may be very limited, but such

barriers could, theoretically, be prohibitively high.

The Limits of Monopoly Power

Unlike the competitive seller, the monopolist has the power to withhold supplies from the

market and to charge more than the competitive market price. Even the pure

monopolist’s market power is not completely unchecked, however. It is restricted in two

important ways. First, without government assistance, the monopolist’s control over the

market for a product is never complete. Even if a producer has a true monopoly of a

good, the consumer can still choose a substitute good whose production is not

monopolized. For instance, in most parts of the nation, only one firm is permitted to

provide local telephone service. Yet people can communicate in other ways. They can

talk directly with one another; they can write letters or send telegrams; they can use their

children as messengers. In a more general sense, consumers can use their income to buy

rugs or bicycles instead of private lines. To the extent that the individual has alternatives,