Economics
Monopoly Power
Monopoly power refers to the ability of a single company to dominate a particular market, giving it significant control over prices and supply. This can lead to reduced competition, higher prices for consumers, and potentially lower quality products or services. Monopoly power can also stifle innovation and limit consumer choice.
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12 Key excerpts on "Monopoly Power"
eBook - ePubMicroeconomic Theory second edition
Concepts and Connections
- Michael E. Wetzstein, Michael Wetzstein(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
13 , we consider the market structure of monopoly behavior. Monopoly is the polar case to perfect competition. In a monopoly market, there is a single firm producing a product for which there are no close substitutes. The firm is the industry and thus faces the market demand curve for its price and output decisions. Given the downward-sloping market demand curve, the monopoly has control over the price it receives for its output. For example, if the monopoly reduced its output, the price per unit it would receive for its output would increase.Monopolies do exist in reality; for example, within a local community, electric, gas,and water companies are generally each a monopoly. Firms with few close substitutes— such as an athletic association offering tickets to a major sporting event, an ice-cream stand on a beach, and a gasoline station on a remote road—can also behave like monopolies. Such firms are said to have some degree of Monopoly Power, defined as the ability to set price above marginal cost. The degree of Monopoly Power depends on the ability of a firm to profitably set its price above the perfectly competitive price. The fewer the number of close substitutes, the closer a firm is to being a true monopoly. Thus, for a monopoly, the demand for the product must be reasonably independent of the price of other products. Specifically, the cross-price elasticity of demandwhich measures the relative responsiveness in the demand for the monopoly product j to changes in the price of commodity i , must bewhere α is some arbitrarily small positive number.Monopoly Power. A firm's ability to set price above marginal cost. E.g., a winery's ability to set a price for its award-wining wine above the marginal cost of production.Application: Monopoly Power and the United States Post OfficeOnly the Post Office is allowed to deliver first-class mail, resulting in a monopoly in existence since the founding of the country. The Post Office has always insisted that it requires this protection for maintaining a national service that reaches every American at the same price. However, this Post Office monopoly on delivering letters will likely fade away. The former Postmaster General Marvin Runyon anticipates a world, by 2020, in which paper mail and electronic mail blend together and the Postal Service is a much more automated operation.Through the natural forces of the marketplace, the Monopoly Power of the Post Office will vanish. By the year 2020, there will be so many ways to communicate, advertise, and ship merchandise that the Monopoly Power of the Post Office will vanish due to natural market forces. Already, electronic mail is a major factor in communications. For example, it costs over 50 cents to deliver a Social Security check by “snail mail” and just 2 cents electronically.The economics are just too compelling not to drive a change. By 2020, it is likely that millions of Americans will be working at home in virtual companies and small home-based businesses. The Postal Service will have to support this working environment by providing the full array of postal services electronically. However, United Parcel Service, Federal Express, and other carriers will be offering these same or similar services.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 5 Monopoly In economics, a monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service, and contrasted with oligopoly where a few entities exert considerable influence over an industry) Monopolies are thus characterised by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. The verb monopolise refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. A monopoly must be distinguished from monopsony, in which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations where one or a few of the entities have market power and therefore must interact with their customers (monopoly), suppliers (monopsony) and the other firms (oligopoly) in a game theoretic manner - meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition where firms are price takers and do not have market power. Monopolists typically produce fewer goods and sell them at a higher price than under perfect competition, resulting in abnormal and sustained profit. Monopolies can form naturally or through vertical or horizontal mergers.
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
Market Power .Market power is the ability of a firm to set the price of a good higher than the cost of production. A firm with market power can influence the price of its product, or the competitive market price.- Market Structure = the organization of an industry, typically defined by the number of firms in an industry.
- Market Power = the ability to affect the price of output. A firm with market power faces a downward-sloping demand curve for its product.
When there are numerous firms in an industry, price competition forces each firm to charge the competitive market price, P = MC. If a competitive firm raises the price of the good it produces, it will sell nothing because its customers shift their purchases to other firms which are selling the same product at the lower competitive price.When there are only a few firms in an industry, individual firms may be able to charge a price higher than the competitive price, forcing consumers to pay more than the product’s cost of production. Since this outcome is inefficient, the US government has legislated against the blatant use of market power. In 1890, the United States passed the Sherman Antitrust Act (1890) to protect consumers from firms that used excessive amounts of market power to influence the prices charged for their products. Giant firms like Standard Oil and the American Tobacco Company were among the first to be regulated by the antitrust laws. Why? Because they used their immense market power to set prices of their products at a level above the cost of production. They, and others, made huge profits from their price-setting activities. Since these practices placed a heavy burden on individual consumers and other sectors of the economy, the government took steps to limit the price-setting abilities of monopolistic firms.
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
market power .Market power is the ability of a firm to set the price of a good higher than the cost of production. A firm with market power can influence the price of its product, or the competitive market price.- • Market Power = the ability to affect the price of output. A firm with market power faces a downward-sloping demand curve for its product.
When there are numerous firms in an industry, price competition forces each firm to charge the competitive market price, P = MC. If a competitive firm raises the price of the good it produces, it will sell nothing because its customers shift their purchases to other firms that are selling the same product at the lower competitive price.When there are only a few firms in an industry, individual firms may be able to charge a price higher than the competitive price, forcing consumers to pay more than the product’s cost of production. Since this outcome is inefficient, the US government has legislated against the blatant use of market power. In 1890, the United States passed the Sherman Antitrust Act (1890) to protect consumers from firms that used excessive amounts of market power to influence the prices charged for their products. Giant firms like Standard Oil and the American Tobacco Company were among the first to be regulated by the antitrust laws. Why? Because they used their immense market power to set prices of their products at a level above the cost of production. They, and others, made huge profits from their price-setting activities. Since these practices placed a heavy burden on individual consumers and other sectors of the economy, the government took steps to limit the price-setting abilities of monopolistic firms.
eBook - ePub- F.J.L. Somers, K.E. Davis-Ost, J.E. Frencken, E. Heuten(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
Finally, a company may contribute to reducing the interchangeability of products and standardisation. As a result of this, customers will be ‘forced’ to choose an established supplier when making a new purchase. This issue played a part in the case referred to at the beginning of this chapter, in which Microsoft refused to make data public that other suppliers needed to have their software link up with the Windows operating system. Another example in this context is ink cartridges for printers: the owner of a specific printer has only a limited choice of cartridges (which are suitable for only one brand or even printer type), and he will pay a relatively high price for these.2.2 Use and abuse of market dominance
In the European Union (but also outside it, e.g. in the United States) having market dominance is not forbidden. In many cases a company acquires market dominance because it performs better (low price, high quality) than its competitors; as a result it creates more loyal customers. It becomes a different story when this company abuses its power. In that case we see unilateral (uncoordinated, see also chapter 3 ) behaviour: the dominant company pushes a competitor, customer or supplier into a disadvantaged position, in some cases eventually – after all competitors have disappeared from the market – creating a monopoly. The abuse may consist of asking excessively high prices or relate to the behaviour of the company: limiting existing and potential competition as much as possible (exclusionary practices) in order to maintain its dominance.The following are the principal ways in which companies may abuse their power:Excessive prices
In chapter 1 (section 1.2.1) we defined market power as the extent to which a company is able to set its prices higher than its marginal costs. It was shown in chapter 1 that in the case of perfect competition the price level will fall to the level of the average total costs. As long as prices are higher, there are supernormal profits, which encourage entry into the market. This leads to more supply in the market and, consequently, to lower prices.In the case of a monopoly, this process will not take place – see the graph below (Figure 2.6 ):FIGURE 2.6 Maximum profit in MonopolyAs discussed in chapter 1 (case study 1.2), a company will achieve maximum profit in the situation that MR = MC. In a monopoly situation (in contrast to a situation of perfect competition) the demand line for individual companies is a descending one (see, for example, figure 1.3
- Walter Nicholson, Christopher Snyder(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
We will use the tools of game theory developed in Chapter 6 to study a number of increasingly complex types of market interaction. P A R T 6 351 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 353 12-1 Causes of Monopoly 12-2 Profit Maximization 12-3 What’s Wrong with Monopoly? 12-4 Price Discrimination 12-5 Natural Monopolies Monopoly A market is described as a monopoly if it has only one supplier. This single firm faces the entire market demand curve. Using its knowledge of this demand curve, the monopoly makes a decision on how much to produce. Unlike the single competitive firm’s output deci-sion (which has no effect on market price), the monopoly output decision will completely determine the good’s price. 12-1 Causes of Monopoly The reason monopoly markets exist is that other firms find it unprofitable or impossible to enter the market. Barriers to entry are the source of all Monopoly Power. If other firms could enter the market, there would, by definition, no longer be a monopoly. There are two general types of barri-ers to entry: technical barriers and legal barriers.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
Your neighborhood convenience store probably also has some degree of Monopoly Power: to draw more customers, it must lower its prices. This contrasts with the competitive wheat farmer who can triple his output and still sell it all at the going market price. How do monopolies behave, and is Monopoly Power ever a good thing? Those are the questions we address in this chapter. We learn how monopolists set prices and quantities, and we study the welfare consequences of those choices. In the second section, we study the sources of Monopoly Power, which leads to a deeper welfare analysis. Finally, in the third section, we learn about a variety of profitable pricing strategies that are available to a monopolist but not viable under perfect competition. 10.1 Price and Output under Monopoly In this section, we learn how a monopolist chooses price and quantity and examine the welfare consequences of these choices. Market power or Monopoly Power The ability of a firm to affect market prices through its actions. A firm has Monopoly Power if and only if it faces a downward-sloping demand curve. 313 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Monopoly Pricing The Tailor Dress Company, which we first met in Exhibit 5.3, is a monopolist. The demand curve for its product, displayed in Exhibit 10.1, is downward sloping. The exhibit also displays Tailor ’ s marginal revenue curve (which can be computed from the demand curve) and its marginal cost curve. Like any firm, Tailor operates at the point where marginal cost equals marginal revenue; that is, it produces 4 dresses.
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
CHAPTER EIGHTMonopolyThe word monopoly wrongly seems to be the briefest of contradictions with mono meaning one and poly meaning many. In fact though, monopoly is a corruption of the Greek words monos polein , which can be translated as one seller. The one-seller monopoly faces a negative-sloping demand function, that of the entire market. This allows it to set the price of its product. But almost all of our gross domestic product is produced by firms which face negative-sloping demand functions and their market structure is monopolistic . The stress of this chapter is on monopolies, but I sometimes stray to include firms which are monopolistic.The Characteristics of a Monopoly Market
The following characteristics of a monopoly market warrant examination: The market has one seller and many buyers. Entry into and exit out of the market are disallowed. The product of the monopoly is standardized and there are no close substitutes. Price is set by the monopoly. There may be a single price for the product or there may be price discrimination with one set of buyers (e.g., “residential”) charged one price and a different set, for example, “business,” charged another. The rate of production is essentially set by buyers who determine how much they wish to purchase at the monopoly-set price. Under monopoly there is no unique relationship between price and the rate of production and, as a result, no theoretical supply function exists.There are two kinds of monopolies: natural and unnatural. The former owes its existence to production which exhibits increasing returns to scale, the latter to institutional power.Figure 8.1. The Long-Run Planning Function and Expected DemandNatural Monopolies
Natural monopolies can be defined as follows:Natural Monopolies
eBook - PDFMicroeconomic Theory
Basic Principles and Extensions
- Walter Nicholson, Christopher Snyder(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Summary In this chapter we have examined models of markets in which there is only a single monopoly supplier. Unlike the competi-tive case investigated in Part 4, monopoly firms do not exhibit price-taking behavior. Instead, the monopolist can choose the price–quantity combination on the market demand curve that is most profitable. A number of consequences then follow from this market power. • The most profitable level of output for the monopolist is the one for which marginal revenue is equal to marginal cost. At this output level, price will exceed marginal cost. The profitability of the monopolist will depend on the relationship between price and average cost. • Relative to perfect competition, monopoly involves a loss of consumer surplus for demanders. Some of this is transferred into monopoly profits, whereas some of the loss in consumer supply represents a deadweight loss of overall economic welfare. • Monopolists may opt for higher or lower levels of quality than would perfectly competitive firms, depending on the circumstances. • A monopoly may be able to increase its profits further through price discrimination—that is, charging dif-ferent prices to different buyers based in part on their valuations. Various strategies can be used, including seg-menting markets based on identifiable characteristics or letting buyers sort themselves on a non-uniform price schedule. The ability of the monopoly to practice price discrimination depends on its ability to prevent arbitrage among buyers. • Governments often choose to regulate natural monop-olies (firms with diminishing average costs over a broad range of output levels). The type of regulatory mech-anisms adopted can affect the behavior of the regulated firm. • The deadweight loss from high monopoly prices can be dwarfed in the long run by dynamic gains if monopolies can be shown to be more innovative than competitive firms, still an open empirical question.
eBook - PDFThe Great Reversal
How America Gave Up on Free Markets
- Thomas Philippon(Author)
- 2019(Publication Date)
- Belknap Press(Publisher)
Each one of these variables contains useful information, but none is a perfect indicator. Taken together, however, they can give us a fairly clear picture of what is happening. Concentration is a bit like cholesterol; there is a good kind and a bad kind. The bad kind occurs when incumbents in an industry are allowed to block the entry of competitors, to collude, or to merge for the primary purpose of increasing their power over market-wide pricing. The good kind is when an industry leader becomes more efficient and increases its market share. In economics, concentration is often a bad sign, but not always. As an indicator of competition, it should always be taken with a grain of salt. And it should always be considered together with profits and prices. We are going to start by discussing the concept of market power. We will then review a few examples of deregulation where all the indicators move in the same direction. We will then study cases that are more dif-ficult to interpret and discuss the expansion of Walmart and Amazon. Market power plays a central role in this book. My central argument is that there has been a broad increase in market power across the US economy, and that this increase has hurt US consumers. We therefore need to understand the causes and consequences of market power. To do so we are going to look at a couple of examples representing stylized markets. 26 . The Rise of Market Power in the United States Market Power Versus Demand Elasticity Market power is a key concept in economics. It measures the ability of a firm to raise its price and increase its profits at the expense of its cus-tomers. Clearly, that can happen only if the customers in question do not have readily available alternatives. If they did, they would react to any price increase by switching to another producer. In economics, we say that market power depends on the elasticity of demand.
eBook - PDFCompetition Policy
Theory and Practice
- Massimo Motta(Author)
- 2004(Publication Date)
- Cambridge University Press(Publisher)
When incumbents behave strategically, things turn even more difficult for en- trants. A monopolist (or more generally a firm with large market power) might engage in many different practices aimed at deterring entrants. Investing in extra capacity, setting prices below cost, flooding a market with many different product specifications, foreclosing access of rivals to crucial inputs, bundling, price discrim- inating, and tying are all possible examples of strategies that can prevent entry. The 2.8 Exercises 89 analysis of exclusionary practices is delayed until Chapter 7, but it is worth recalling here that competition authorities should be vigilant and promptly intervene when- ever monopolists impede entry through practices whose profitability derives only from their ability to keep entrants offthe market. This is an important issue, as well as a difficult one, since in most cases it is hard to tell genuine competitive strategies from predatory ones. 2.7 SUMMARY AND POLICY CONCLUSIONS This chapter has illustrated the relationship between market power and welfare. The analysis of allocative efficiency has shown that market power brings about a welfare loss, due to higher prices than in a competitive situation. Productive and dynamic inefficiencies (higher production costs and lower innovation rates) might also be associated with market power. This explains why competition policy should be concerned with market power. However, I have also argued that the elimination of market power - even if it were practicable - is not one of the objectives competition policy agencies should pursue. Indeed, the prospect of having some market power (i.e., some profit) represents a most powerful incentive for firms to innovate and invest. Competition laws and their enforcement should therefore ensure that firms will be able to enjoy the rewards for their investments. I have therefore argued that any expropriation of firms' assets (whether material or immaterial) should be avoided.
eBook - PDFRegulating Public Services
Bridging the Gap between Theory and Practice
- Emmanuelle Auriol, Claude Crampes, Antonio Estache(Authors)
- 2021(Publication Date)
- Cambridge University Press(Publisher)
In this case the activity is a natural monopoly. 1 Despite low marginal costs, the large upfront capital costs create barriers to entry. They limit the optimal number of participating firms in the market. In the monopoly case, the demand to the firm is the whole market demand, which to some extent makes regulation simpler. This is the case we focus on for now. In practice, there is a trade-off between the gains from scale economies that can be achieved by relying on a single provider and the risks of welfare losses stemming from the strong bargaining power this monopolist will enjoy. Addressing this trade-off is one of the roles of a regulator. If the monopolist is allowed to capture all the gains from the scale effects, society may not be better off than it was under a more 1 An industry can be defined formally as a natural monopoly if the technology is such that any vector of outputs will cost less when produced in one single firm than if it is shared among several firms, whatever the sharing rule. In the single-product case, it is equivalent to economies of scale or decreasing average cost. If the industry supplies several products, the natural monopoly definition necessitates a combination of conditions on economies of scale and economies of scope (see Box 2.2). 59 competitive environment. This is why the government needs to consider influencing the choices made by the monopolist if that ends up being the preferred market structure. To design the government’s intervention, however, it is essential to under- stand the business decisions of the monopolist, including its optimal production and pricing strategy. This starts with a better formal appreciation of the relevance of the time dimension in industries requiring large and lumpy investments and of the way in which short- and long-term incentives differ for a monopolist.
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