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Monopoly
© 2015 Pearson Education, Inc.
1
What is Monopoly and Why Do We Study It?
Monopoly is a market structure consisting of a firm that is the only
seller of a good or service that does not have a close substitute.
Monopoly exists at the opposite end of the competition spectrum from
perfect competition.
We study monopolies for two reasons:
1. Some firms truly are monopolists, so it is important to understand
how they behave.
2. Firms might collude in order to act like a monopolist, with
important implications for firm behavior.
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Is Any Firm Ever Really a Monopoly?
15.1 LEARNING OBJECTIVE
Define monopoly.
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Are There Really Monopolies?
It is reasonable to ask whether monopolies truly ever exist.
For example, suppose you live in a small town with only one pizzeria.
Is that pizzeria a monopoly?
1. It has competition from other fast-food restaurants
2. It has competition from grocery stores that provide pizzas for you
to cook at home
If you consider these alternatives to be close substitutes for pizzeria
pizza, then the pizza restaurant is not a monopoly.
If you do not consider these alternatives to be close substitutes for
pizzeria pizza, then the pizza restaurant is a monopoly.
Regardless, the pizzeria’s unique position may afford it some
monopoly power to raise prices, and obtain positive economic profit.
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Where Do Monopolies Come From?
15.2 LEARNING OBJECTIVE
Explain the four main reasons monopolies arise.
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Reasons Why Monopolies Exist
For a firm to exist as a monopoly, there must be barriers to entry
preventing other firms coming in and competing with it.
The four main reasons for these barriers to entry are:
1. Government restrictions on entry
2. Control over a key resource
3. Network externalities
4. Natural monopoly
The next few slides will examine these in detail.
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1. Government Restrictions on Entry
In the U.S., governments block entry in two main ways:
a. Patents, copyrights, and trademarks
Newly developed products like drugs are frequently granted patents,
the exclusive right to produce a product for a period of 20 years from
the date the patent is filed with the government.
Similarly, copyrights provide the exclusive right to produce and sell
creative works like books and films.
Patents and copyrights encourage innovation and creativity, since
without them, firms would not be able to substantially profit from their
endeavors. Trademarks, also known as brand names, work similarly.
b. Public franchises
A government designation that a firm is the only legal provider of a
good or service is known as a public franchise. These might exist,
for example, in electricity or water markets.
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2. Control Over a Key Resource
For many years, the Aluminum Company of America (Alcoa) either
owned or had long-term contracts for almost all the world’s supply of
bauxite, the mineral from which we obtain aluminum.
Such control over a key resource served as a substantial barrier to
entry for additional firms.
The National Football League (NFL) acts as a monopoly in this
manner too: it ensures that the majority of the world’s best football
players are under contract to the NFL, and unable to be used for
another potential league.
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3. Network Externalities
Economists refer to network externalities as a situation in which the
usefulness of a product increases with the number of consumers who
use it.
Examples:
HD televisions
Computer operating systems (like Windows)
Social networking sites (like Facebook)
These network externalities can set off a virtuous cycle for a firm,
allowing the value of its product to continue to increase, along with
the price it can charge.
But consumers may be locked into an inferior product.
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4. Natural Monopoly
A natural monopoly
occurs when economies
of scale are so large that
one firm can supply the
entire market at a lower
average total cost than
can two or more firms.
In the market for
electricity delivery, a
single firm (point A) can
deliver electricity at a
lower cost than can two
firms (point B).
Figure 15.1
Average total cost
curve for a natural
monopoly
This is often because of high fixed costs; in this example, the cost of
erecting power lines and transformers, for example.
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How Does a Monopoly Choose Price and Output?
15.3 LEARNING OBJECTIVE
Explain how a monopoly chooses price and output.
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The Return of Marginal Cost and Marginal Revenue
In our study of oligopoly, we abandoned the idea of marginal cost and
marginal revenue, because the strategic interaction between firms
overrode these concepts.
Monopolists have no competitors, and hence no concern about
strategic interactions.
• They seek to maximize profit by choosing a quantity to produce,
just like perfect and monopolistic competitors.
In fact, monopolists act very much like monopolistic competitors: they
face a downward sloping demand curve.
• The difference is that barriers to entry will prevent other firms from
competing away their economic profit.
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Calculating a Monopoly’s Revenue
Time Warner Cable
is a monopolist in
the market for cable
television services.
The first two
columns of the
table show the
market demand
curve, which is also
Time Warner’s
demand curve.
Total, average, and
marginal revenue
are all calculated in
the usual manner.
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Figure 15.2a
Calculating a monopoly’s
revenue (table)
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Calculating a Monopoly’s Revenue—continued
As the monopolist seeks to
expand its output, two effects
occur:
1. Revenue increases from
selling an additional unit
of output at whatever
price is necessary to
convince an additional
customer to purchase it.
2. Revenue decreases,
because the price
reduction is shared with
existing customers.
So marginal revenue is
always below demand for a
monopolist.
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Figure 15.2b
Calculating a monopoly’s
revenue (graph)
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Profit-Maximizing Price and Output for a Monopoly
Figure 15.3a
Profit-maximizing price and
output for a monopoly
The monopolist maximizes profit by producing the quantity where the
additional revenue from the last unit (marginal revenue) just equals
the additional cost incurred from its production (marginal cost).
MC = MR determines quantity for a monopolist.
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Price and Output for a Monopoly—continued
Figure 15.3a&b
Profit-maximizing price and
output for a monopoly
At this quantity,
• The demand curve determines price, and
• The average total cost (ATC) curve determines average cost.
Profit is the difference between these (P–ATC), times quantity (Q).
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Long-Run Profits for a Monopoly
Since there are barriers to entry, additional firms cannot enter the
market.
• So there is no distinction between the short run and long run for a
monopoly.
Then, unlike for monopolistic competitors, we expect monopolists to
continue to earn profits in the long run.
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Does Monopoly Reduce Economic Efficiency?
15.4 LEARNING OBJECTIVE
Use a graph to illustrate how a monopoly affects economic efficiency.
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Comparing Monopoly and Perfect Competition
Suppose that a market could be characterized by either perfect
competition or monopoly. Which would be better?
The thought experiment here is to suppose there is some market that
is perfectly competitive, such as the market for smartphones.
Then a single firm buys up all of the smartphones in the country.
What would happen to:
• Price of smartphones?
• Quantity of smartphones traded?
• The net benefit for consumers (i.e. consumer surplus)?
• The net benefit for producers (i.e. producer surplus)?
• The net benefit for all of society (i.e. economic surplus)?
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If a Perfect Competition Became a Monopoly…
Figure 15.4
What happens if a perfectly competitive
industry becomes a monopoly?
The market for smartphones is initially perfectly competitive.
Price is PC, quantity traded is QC.
Now the market is supplied by a single firm. Since the single firm is
made up of all of the smaller firms, the marginal cost curve for this
new firm is identical to the old supply curve.
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… Quantity Will Fall and Price Will Rise
Figure 15.4
What happens if a perfectly competitive
industry becomes a monopoly?
But the new firm maximizes market profit, producing the quantity
where marginal cost equals marginal revenue (MC = MR).
This quantity (QM) is lower than the competitive quantity (QC)…
… and the firm charges the corresponding price on the demand
curve, PM. This price is higher than the competitive price, PC.
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Measuring the Efficiency Losses from Monopoly
Fewer smartphones will be traded at a higher price.
• Consumer surplus will fall (with the higher price).
• Producer surplus must rise, otherwise the firm would have chosen
the perfectly competitive price and quantity.
Could the increase in producer surplus offset the decrease in
consumer surplus?
• No! Perfectly competitive markets maximized the economic (total)
surplus in a market; if fewer trades take place, the economic
surplus must fall.
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The Inefficiency of Monopoly
With the higher monopoly
price, consumer surplus
decreases by the areas
A+B.
Producer surplus falls by
C, but rises by A; an
overall increase.
Area A is simply a
transfer of surplus:
neither inherently good
nor bad.
But areas B and C are
lost surpluses:
deadweight loss.
Figure 15.5
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The inefficiency of
monopoly
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How Large Are the Efficiency Losses?
There are relatively few monopolies, so the loss of economic
efficiency due to monopolies must be relatively small.
• But many firms have market power: the ability of a firm to charge
a price greater than marginal cost.
• In fact, the only firms that do not have market power are perfectly
competitive firms; and perfect competition is rare.
Economists estimate that overall, the loss of efficiency in the United
States due to market power is probably less than 1% of total U.S.
production—about $500 per person annually.
• Why so low? Most firms face a relatively large degree of
competition, resulting in prices much closer to marginal cost than
we would see with monopolies.
So deadweight loss due to market power is relatively small.
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An Argument in Favor of Market Power
Market power may produce some benefit for an economy; the
prospect of market power (and the resulting economic profits) drives
firms to innovate, creating new products and services.
• This drive affects large firms—who reinvest profits in the hope of
making larger future profits—and small firms—who hope to obtain
profits for themselves—alike.
The Austrian economist Joseph Schumpeter claimed that this drive
would create a “gale of creative destruction” that would eventually
benefit consumers more than increased price competition.
• This helps to explain governmental ambivalence regarding large
firms with market power.
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Government Policy toward Monopoly
15.5 LEARNING OBJECTIVE
Discuss government policies toward monopoly.
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Antitrust Laws and Antitrust Enforcement
In the 1870s and
1880s, several “trusts”
had formed: boards of
trustees that oversaw
the operation of several
firms in an industry,
and enforced collusive
agreements.
This helped prompt
U.S. antitrust laws,
aimed at eliminating
collusion and
promoting competition
among firms. The most
important of these laws
are detailed here.
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Law
Date
Enacted Purpose
Sherman
Act
1890
Prohibited “restraint of trade,”
including price fixing and collusion.
Also outlawed monopolization.
Clayton Act
1914
Prohibited firms from buying stock
in competitors and from having
directors serve on the boards of
competing firms.
Federal
Trade
Commission
Act
1914
Established the Federal Trade
Commission (FTC) to help
administer antitrust laws.
RobinsonPatman Act
1936
Prohibited firms from charging
buyers different prices if the result
would reduce competition.
CellarKefauver
Act
1950
Toughened restrictions on mergers
by prohibiting any mergers that
would reduce competition.
Table 15.1
Important U.S. antitrust
laws
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Mergers without Efficiency Gains
The Federal government is
particularly concerned about
horizontal mergers: mergers
between firms in the same
industry, as opposed to vertical
mergers between two firms at
different stages of the production
process.
• Such mergers are likely
enhance firms’ market power.
The graph shows such a merger,
increasing the price from the
competitive price (PC) to the
monopoly price (PM), and
resulting in deadweight loss.
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Figure 15.6
A merger that makes
consumers better off
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Mergers with Efficiency Gains
Firms seeking to merge typically
argue that the resulting larger
firm will have lower costs, and
hence be able to produce more
efficiently.
• Then even if they charge the
(new) monopoly price, the
result is an improvement for
consumers.
However, costs may not
decrease by as much as the
firms claim, resulting in
consumers being worse off.
• Economists with the FTC and
Department of Justice review
potential mergers one-by-one.
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Figure 15.6
A merger that makes
consumers better off
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DOJ and FTC Merger Guidelines
Economists and lawyers at the Department of Justice and the Federal
Trade Commission developed guidelines for themselves and firms to
use in evaluating whether potential merger was acceptable.
These include:
1. Market definition
2. Measure of concentration
3. Merger standards
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1. Market Definition
Suppose Hershey Foods sought to merge with Mars Inc.
• In what market do these firms compete? The market for candy?
The market for snacks? The market for all food?
The more broadly defined the market, the smaller (and more
harmless) the merger appears.
To determine the appropriate scope of the market, the government
tries to determine which goods are close substitutes for those
produced by the firms.
• The “appropriate market” is defined as the smallest market
containing the firms’ products for which an overall price rise within
the market would result in total market profits increasing.
• (If profits would decrease, there must be adequate substitutes
available; hence the market is too narrowly defined.)
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2. Measure of Concentration
A market is concentrated if a relatively small number of firms have a
large share of total sales in the market.
To determine if a market is concentrated, the government uses the
Herfindahl-Hirschman Index (HHI), created by squaring the
percentage market shares of each firm, and adding up the results.
Some examples are given below:
Firm market shares
Formula
HHI
100%
1002
10,000
50%, 50%
502 + 502
5,000
30%, 30%, 20%, 20%
302 + 302 + 202 + 202
2,600
10%, 10%, …, 10%
10 x 102
1,000
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3. Merger Standards
Based on the calculated HHI values, the DOJ and FTC apply the
following standards to determine if they ought to challenge the
potential merger of two or more firms:
Increase in HHI
Post-merger
HHI
< 100
100 – 200
> 200
< 1,500
Challenge unlikely
Challenge unlikely
Challenge unlikely
1,500 – 2,500
Challenge unlikely
Challenge possible
Challenge possible
> 2,500
Challenge unlikely
Challenge possible
Challenge very likely
Firms having their merger applications challenged must satisfy the
DOJ and FTC that their merger would result in substantial efficiency
gains. The burden of proof is on the merging firms.
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Regulating Natural Monopolies
Natural monopolies have the potential to serve customers more
cheaply than multiple firms. But the usual market forces that drive
prices down do not exist.
Local and/or state regulatory commissions typically set prices for
these natural monopolies, instead of allowing the firms to set their
own price.
But that raises the question: what price should the regulators choose?
• A price that makes the monopoly make zero profit?
• The efficient price that would maximize consumer welfare?
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Regulating a Natural Monopoly
If the natural
monopoly were
not subject to
regulation, it
would choose
quantity QM and
price PM.
Efficiency (MC =
MR) suggests a
price of QE. But
then the firm
makes a loss.
Figure 15.7
Regulating a natural monopoly
The typical compromise is to allow the firm to charge a price
where it can make zero economic profit: PR. The resulting quantity
QR is hopefully close to the efficient level, keeping deadweight
loss small.
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Oligopoly
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Oligopoly: A Very Different Market Structure
In the previous chapters, we examined perfect and monopolistic
competition.
We were able to use similar logic to argue how those firms would
behave: they would produce until their marginal cost was equal to
marginal revenue, and the low barriers to entry would result in profit
being competed away in the long run.
Oligopoly, a market structure in which a small number of
interdependent firms compete, will require completely different tools
to analyze. Why?
1. Oligopolists are large, and know that their actions have an effect
on one another.
2. Barriers to entry exist, preventing firms from competing away
profits.
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Oligopoly and Barriers to Entry
14.1 LEARNING OBJECTIVE
Show how barriers to entry explain the existence of oligopolies.
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Which Markets Are Oligopolistic?
Before we analyze how oligopolists behave, it is useful to know which
firms/markets we are discussing.
A useful tool for identifying the type of market structure is the four-firm
concentration ratio: the fraction of an industry’s sales accounted for
by its four largest firms.
A four-firm concentration ratio larger than 40% tends to indicate an
oligopoly.
Although there are limits to how useful four-firm concentration ratios
can be, they are a useful tool in discussing the concentration of
market power within an industry.
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Examples of Oligopolies
Retail Trade
Industry
Manufacturing
Four-Firm
Concentration
Ratio
Four-Firm
Concentration
Ratio
Industry
Discount department
stores
97%
Cigarettes
98%
Warehouse clubs and
supercenters
94%
Beer
90%
College bookstores
75%
Computers
87%
Hobby, toy, and game
stores
72%
Aircraft
81%
Radio, television, and
other electronic stores
70%
Breakfast cereal
80%
Athletic footwear stores
68%
Dog and cat food
71%
Pharmacies and
drugstores
63%
Automobiles
68%
Table 14.1
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Examples of oligopolies in
retail trade and manufacturing
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Why Do Oligopolies Exist?
Oligopolies often exist because of barriers to entry: anything that
keeps new firms from entering an industry in which firms are earning
economic profits.
One example of a barrier to entry is economies of scale: the
situation when a firm’s long-run average costs fall as the firm
increases output.
• This can make it difficult for new firms to enter a market, because
new firms usually have to start small, and will hence have
substantially higher average costs than established firms.
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Economies of Scale and the Extent of Competition
An industry will be
competitive if the
minimum point on the
typical firm’s long-run
average cost curve
(LRAC1) occurs at a
level of output that is a
small fraction of total
industry sales, such as
Q1.
The industry will be an
oligopoly if the minimum
point comes at a level of
output that is a large
fraction of industry
sales, such as Q2.
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Figure 14.1
Economies of scale help
determine the extent of
competition in an industry
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Why Else Do Oligopolies Exist?
Ownership of a key input
• If control of a key input is held by one or a small number of firms, it
will be difficult for additional firms to enter.
• Examples: Alcoa—bauxite for aluminum production
De Beers—diamonds
Ocean Spray—cranberries
Government-imposed barriers
• Governments might grant exclusive rights to some industry to one
or a small number of firms.
• Examples: Occupational licensing for dentists and doctors
Patents
Tariffs and quotas imposed on foreign companies
Patent: The exclusive right to a product for a period of 20 years from
the date the patent is filed with the government.
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Using Game Theory to Analyze Oligopoly
14.2 LEARNING OBJECTIVE
Use game theory to analyze the strategies of oligopolistic firms.
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Why Do We Need a Special Theory for Oligopoly?
Perfect and monopolistic competitors were easily analyzed using a
graph of their own costs and revenues.
But remember that each of these firms were small relative to the
market, so their actions were essentially insignificant to other firms.
This is not true for oligopolies. Oligopolists are large relative to the
market, and the actions of one oligopolist make large differences in
the profits of another.
Oligopolies are best analyzed using a specialized field of study called
game theory.
Game theory: The study of how people make decisions in situations
in which attaining their goals depends on their interactions with
others; in economics, the study of the decisions of firms in industries
where the profits of a firm depend on its interactions with other firms.
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Game Theory
Game theory was developed during the 1940s and advanced by
mathematicians and social scientists like economists.
All “games” share certain characteristics:
1. Rules that determine what actions are allowable
2. Strategies that players employ to attain their objectives in the
game
3. Payoffs that are the results of the interactions among the players’
strategies
For example, we can model firm production as a “game”:
• Rules: the production functions and market demand curve
• Strategies: Firms’ production decisions
• Payoffs: Firms’ profits
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A Duopoly Game: Price Competition Between Two Firms
In this payoff matrix, Sony’s
profits are in blue, and
Microsoft’s profits are in red.
Sony and Microsoft would
each make profits of $10
million per month on sales of
video game consoles if they
Figure 14.2 A duopoly game
both charged $499.
If one charges $499 and the other charges $399, the one with a
low price earns $15 million per month, while the other earns only
$5 million per month.
If both firms charge $399, they would each make a profit of only
$7.5 million per month.
How would you “play” this duopoly game?
Duopoly: An oligopoly with two firms
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A Dominant Strategy for Sony
Suppose you are Sony in
this duopoly game.
• If Microsoft charges
$499, you earn more
profit by charging $399.
• If Microsoft charges
$399, you earn more
profit by charging $399.
Figure 14.2
A duopoly game
Either way, charging $399 seems makes the most profit. It is a
dominant strategy for Sony.
Dominant strategy: A strategy that is the best for a firm, no matter
what strategies other firms use.
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A Dominant Strategy for Microsoft Also
Now suppose you are
Microsoft:
• If Sony charges $499,
you earn more profit by
charging $399.
• If Sony charges $399,
you earn more profit by
charging $399.
Figure 14.2
A duopoly game
Either way, charging $399 seems makes the most profit. It is a
dominant strategy for Microsoft to charge $399 also!
Each firm charging $399 is a Nash equilibrium: a situation in
which each firm chooses the best strategy, given the strategies
chosen by the other firms.
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Could the Firms Do Better?
Notice that this outcome
is not good for Sony or
Microsoft; if they could
cooperate somehow, they
could each earn more
profit.
Figure 14.2
A duopoly game
This is the benefit of collusion: an agreement among firms to
charge the same price or otherwise not to compete.
Collusion is against the law in the United States, but you can see
why firms might be tempted to collude: their profits could be
substantially higher.
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Prisoner’s Dilemma
Economists and other social scientists refer the situation with Sony
and Microsoft as a prisoner’s dilemma: a game in which pursuing
dominant strategies results in noncooperation that leaves everyone
worse off.
The name comes from a problem faced by two suspects the police
arrest for a crime.
• The police offer each suspect a suspended prison sentence in
exchange for confessing to the crime and testifying against the
other suspect.
• Each suspect has a dominant strategy to confess; but if both
confess, they both go to jail for a long time, while they both could
have gone to jail for a minimal length if they had both remained
silent.
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Can Firms Escape the Prisoner’s Dilemma?
Suppose Domino’s and Pizza
Hut are deciding how to price
a pizza: $12 or $10.
• This game gets played not
once, but every day.
A clever way to avoid the lowprofit Nash equilibrium is to
advertise a price-match
guarantee. Then if either firm
cuts prices, the other has
guaranteed to do so as well.
• Now neither firm will have
an incentive to cut prices.
• Price-match guarantees
aren’t as good for
consumers as they appear.
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Figure 14.3
Changing the payoff matrix
in a repeated game
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Other Methods for Avoiding Price Competition
A price-match guarantee is an enforcement mechanism, making
automatic the decision about whether to punish a competing firm for
charging a low price.
Another method is price leadership, a form of implicit collusion in
which one firm in an oligopoly announces a price change and the
other firms in the industry match the change.
• Example: In the 1970s, General Motors would announce a price
change at the beginning of a model year, and Ford and Chrysler
would match GM’s price change.
Such forms of implicit collusion are desirable for firms, because
explicit collusion is illegal, resulting in government fines and penalties,
along with a possible public backlash.
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Cartels: The Case of OPEC
A cartel is a group
of firms that collude
by agreeing to
restrict output to
increase prices and
profits.
This form of explicit
collusion is illegal in
the United States;
but not in some
Figure 14.4 Oil prices, 1972 to mid-2013
other locations.
The most well-known cartel is OPEC, the Organization of the
Petroleum Exporting Countries.
• OPEC members colluded to restrict output and raise prices in the
1970s and 1980s.
• But collusion has proved difficult to maintain over time.
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Analyzing the OPEC Cartel with Game Theory
Because Saudi Arabia
can produce much
more oil than Nigeria, its
output decisions have a
much larger effect on
the price of oil.
• Saudi Arabia has a
dominant strategy to
cooperate and
Figure 14.5 The OPEC cartel with
produce a low
unequal members
output.
Nigeria, however, has a dominant strategy not to cooperate and
instead produce a high output.
• In order to punish Nigeria for defecting, Saudi Arabia would have
to hurt itself substantially. Would it be worth it to you?
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Sequential Games and Business Strategy
14.3 LEARNING OBJECTIVE
Use sequential games to analyze business strategies.
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Simultaneous vs. Sequential Games
The game theory models we have analyzed so far have been
simultaneous: the players have made their decisions at the same
time.
But some games are sequential in nature: one firm makes a decision,
and the other makes its decision having observed the first firm’s
decision.
• We analyze such games using a decision tree, indicating who gets
to make a decision at what point, and what the consequences of
their decision will be.
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The Decision Tree for an Entry Game
In this game, Apple
decides whether to
charge $1000 or
$800 for its new ultra
light laptop;
then Dell decides
whether or not to
Figure 14.6
enter the market.
The decision tree for an entry game
Apple “looks ahead”, and realizes that if it charges the high price,
Dell will enter and compete with Apple.
If Apple charges the low price, Dell’s rate of return will not be
sufficient to warrant entry.
So Apple can deter Dell from entering the market by preemptively
charging the low price.
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The Decision Tree for a Bargaining Game
Dell is deciding
whether to offer $20
or $30 per copy for
TruImage’s software.
Then TruImage will
have the opportunity
to accept or reject Figure 14.7
the offer.
The decision tree for a bargaining game
Dell will look ahead, and realize that TruImage is better off
accepting Dell’s offer, no matter what price Dell offers.
Therefore Dell should offer the low price, anticipating that TruImage
will accept the offer.
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Can TruImage Threaten Not to Accept the Offer?
Notice that
TruImage would
like to threaten to
reject an offer of
$20.
If Dell believed the
threat, its best
action would be to
offer $30.
Figure 14.7
The decision tree for a bargaining game
But Dell shouldn’t believe the threat; it is not credible, since it would
involve TruImage hurting itself with no opportunity for redemption.
Only the original outcome is a subgame-perfect equilibrium: a Nash
equilibrium in which no player can improve their outcome by changing
their decision at any decision node.
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The Five Competitive Forces Model
14.4 LEARNING OBJECTIVE
Use the five competitive forces model to analyze competition in an industry.
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The Five Competitive Forces Model
Michael Porter of Harvard Business School identifies five separate
competitive forces that determine the overall level of competition in an
industry:
1. Existing firms
Example: Educational Testing Service administers the SAT ($51) and
GRE ($150) tests. The SAT has competition from the ACT, helping
keep its price low. The GRE has no similar competitor.
2. Threat from new entrants
Example: In the previous section, Apple charged a low price to deter
Dell from entering its market.
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The Five Competitive Forces Model—continued
3. Competition from substitutes
Example: Printed encyclopedia sets used to cost well over $1000, but
parents would buy them because there were no good substitutes.
But the advent of cheap computer-based encyclopedias helped drive
printed encyclopedia producers out of business.
4. Bargaining power of buyers
Example: Large companies like Wal-Mart can threaten to buy goods
from competitors, forcing suppliers to keep their prices low.
5. Bargaining power of suppliers
Example: As a start-up, Microsoft couldn’t force IBM to pay a high
price for its operating system.
But as Microsoft became the dominant player in operating systems, it
could charge much more to computer manufacturers.
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