How did the monopoly arise? Did the monopoly increase barriers to entry? Does th
ID: 1234078 • Letter: H
Question
How did the monopoly arise? Did the monopoly increase barriers to entry? Does the company behave like a monopoly or more like a competitive firm? Has the monopoly been cited for monopoly behavior? If so, discuss the behavior and the final outcome of the case. (Hint: Both Microsoft and Wal-Mart have been found guilty of monopoly behavior.)Assessment Preparation Checklist:
The focus of this analysis assignment is to calculate revenue, cost, and profit measures for a monopoly and a perfectly competitive firm. To help you prepare for this analysis prior to attempting the assignment:
Explanation / Answer
Solution
A monopoly exists where there is only one supplier of a product or service. This allows the supplier to charge higher prices than if there was competition. There are degrees of monopoly and only the market in a commodity is completely free of monopoly pricing power.
What is usually meant by a monopoly is that there is no competition and therefore the supplier has a very high degree of pricing power. If there is no competition, the product being sold should have a price cross elasticity close to zero with any other product. As prices change, volumes sold follow the demand curve for the market; if prices rise, buyers either pay up or do without rather than switching to another supplier.
A market that falls short of monopoly but which also falls short of perfect competition is described as having monopolistic competition or imperfect competition.
Monopolies can arise in a number of ways including:
Legally enforced monopolies on an entire market.
Patents and copyrights: these create (usually very narrow) legally enforced monopolies on particular products or services.
Natural monopolies: this includes many utilities where the cost of building a distribution network makes building more than one uneconomic.
Cartels: agreements by former competitors to cooperate on pricing or market share; illegal in most countries.
Network effects: these can both help create a monopoly and make it difficult to dislodge once established.
Control of access to a market: e.g. if a retailer can buy up all the best sites for distributing a particular product in a particular area they can choke off the competition's access to customers.
It is clearly beneficial for a suppliers to try to reduce competition to their own products as far as possible, this may through differentiation of their products, building barriers to entry and deliberately exploiting network effects.
Most countries have anti-monopoly (often, especially in the US, called anti-trust) legislation to control the creation and abuse of monopolies and regulators empowered to enforce these laws. This has been fairly successful at stopping some types of abuses (such as the formation of cartels or the buy-out of competition) but has a more mixed record in dealing with network effects and ensuring access to markets.
Where the monopoly is one of buying rather than supplying, it is a monopsony.
The behavior and the final outcome of the case
Two of the favorite villains of the left are Wal-Mart and Microsoft - they are so powerful that they can get away with anything. Or that's the claim anyway.
The common approach to such claims is to argue that Microsoft or Wal-Mart is great and the benefits outweigh the costs that these behemoths may impose on the marketplace. But this is really the wrong approach because it concedes that Wal-Mart and Microsoft are, indeed, monopolies. It takes a very liberal (excuse the pun) definition of monopoly to fit Wal-Mart or Microsoft into the definition.
In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933).Joan Robinson published a book The Economics of imperfect competition' with a comparable theme of distinguishing perfect from imperfect competition.
Monopolistically competitive markets have the following characteristics:
There are many producers and many consumers in the market, and no business has total control over the market price.
Consumers perceive that there are non-price differences among the competitors' products.
There are few barriers to entry and exit.
Producers have a degree of control over price.
The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
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