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Chapter 22
Name the Monopolist
John D Rockefeller
Standard Oil
JP Morgan
US Steel
Bill Gates
Microsoft
Alexander Graham
Bell
Bell Telephone
Monopoly the other extreme of
The “Big 4”Market Structures
Perfect Competition:
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Many Sellers
Identical Products
Entry in to market (and leaving) is easy
No Market power
Monopoly:
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A firm with lone seller of a product with no close substitutes
No subs because product or service is “unique and/or nonreproducible”
Barriers exist for entry into the market
Total Market Power! (Price setter)
Moving Toward Monopoly
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As the lone or dominant seller of a product or
service, a monopoly is in a good position to
earn economic profit.
All businesses dream of monopoly power…
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Finding a “Competitive Advantage”
“Cornering the market”
Having a “benchmark” product – I-Phone
Firms today that are dominant…
Google, Facebook, Netflicks, Intel, Sirius XM Radio,
Microsoft
Monopolistic factors:
Barriers to Market Entry
Barriers to entry – In order for a firm to maintain its monopolistic
position there must be “forces” that block the entry of new
firms into the market. There are 3 general types of barriers.
#1 - Legal Barriers
Public Franchise – The government grants one firm an
exclusive right to provide a good or service to a market.
Example - NPD (Nebraska Power District). NPD is subject to
government regulations as a public franchise. These are often
natural monopolies….companies that operate on huge
economies of scale and require huge capital
More Legal Barriers
Patents– A government granted monopoly on the
production and sale of an invention granted to the
inventor. Most patents are for 20 years. Many
pharmaceuticals are 7 years
A.
Patents are incentive to create and innovate
B.
Patents are payback for research and
development costs
C.
Examples: Stephanie Kwolek (DuPont – Kevlar)
Eli Lilly (Prozac) Stock dropped by 1/3 when patent
ran out
More Legal Barriers
Copyrights – A copyright is a government granted
monopoly on the production and sale of a creative
work granted to the creator. Most copyrights are for
the life of the author plus 70 years.
 This monopoly position is a reward for creative
behavior
Question:
Who the 10 wealthiest dead celebrities?
Top 10 Dead Celebrities
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#10 – Bruce Lee
#9 – Albert Einstein
#8 – Theodore Geisel
#7 – John Lennon
#6 – Marilyn Monroe
#5 – Bob Marley
#4 – Elizabeth Taylor
#3 – Charles Shultz
#2 – Elvis Presley
#1 – Michael Jackson
More Legal Barriers
License – A license is a permit issued by the
government authorizing a person to conduct a certain
type of business. Entry into the market depends upon
obtaining a license.
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Cable Television Networks (2 per region?)
Cell Phone Companies (Bandwidth)
Television and Radio Stations (FCC)
NYC Cabs (13,000 by city regulation)
More Legal Barriers
Trade Restrictions – These are government imposed
limitations on international trade using tariffs and quotas.
 Policy of “Protectionism” – farming, oil, textiles, autos
#2 - Economies of Scale
Economies of scale exist when, as the scale of
production is increased, average costs of production
decrease. Huge fixed costs up front…but as production
increases total costs drop.
Nuclear Power Plants
Natural Monopoly –
when extreme
economies of scale
exist (water, power, NASA)
#3 Exclusive ownership of
an essential resource
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Alcoa – Early in the century, Alcoa owned or
controlled most of the bauxite in the US. Bauxite is the
chief ore of commercial grade aluminum.
This is very rare!
The Problems with Monopolies
1.
2.
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“Rent Seeking” – when people use resources to
manipulate public policy in order to redistribute income to
themselves from others (lobbying, campaign contributions,
public relations efforts) Very socially wasteful because it
results in a deadweight loss. (page 22-7)
Makes firm less responsive to consumer demand –
consumers want our producers to be very responsive
Makes firm less diligent to minimize costs of production –
keeping production costs down keep prices down
More Problems with Monopolies
Price Discrimination – occurs when a seller charges
different prices to different buyers for the same good.
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Coupons or discounts: for the cost-conscious
Negotiating: start high and end lower
Test Questions
Chapter 19
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Fill in: 1-8
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MC: 1-4, 6-17
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Problems: 1-4
Chapter 21
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Fill in: 1-5
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MC: 1-4, 13-15
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Problems: (none)
Chapter 22
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Fill in: 1-9
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MC: 1-3, 11, 17-20
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Problems: 1