monopoly slides
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In brief, what is a monopoly In relation to Microsoft
A copyright from the Government gives Microsoft the right to make and sell copies of the Windows operating system. So when we decide to purchase a copy of Windows, we have little choice but to pay the price that the firm charges for the product. Microsoft is said to have a ‘Monopoly’ in the market for windows as it is used by over 90% of the PC’s in the world! A Monopoly like Microsoft has no close competitors and therefore can influence the market price of its product. A Monopoly firm is referred to as a ‘price maker’.
Market Power: Alters relationship between a firm’s costs and the price at which it sells that product to the market. A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price=marginal cost. The prices that a monopoly charges exceeds marginal cost. This is evident in the case of Microsoft’s Windows. So, without a doubt, it’s no surprise that monopolies charge high prices for their products. So why don’t Microsoft charge €500 instead of €50 for their software?? The answer is simple- Because the higher the price they charge, the fewer people who will purchase their product at that price. People would find other alternatives such as purchasing less computers, changing over to other operating systems or take the illegal route.. We must remember that monopolies cannot actually obtain any level of profit they wish. Why? Because higher prices result in fewer customers.
Below is a link on an interesting article on the issue of ‘The Microsoft Monopoly: The Facts, the Law and the Remedy’. http://www.pff.org/issues-pubs/pops/pop7.4microsoftmonopolyfacts.html
Why monopolies arise?
Monopoly: A firm that is the sole seller of a product without close substitutes. Firms are said to have a monopoly power if they are a dominant seller in the market and can exert some control over the market because of this. The fundamental cause of a monopoly is ‘’barriers to entry’’: a monopoly stays the only seller in its market as other firms cannot enter/compete with it. Barriers to entry have four main sources:
Barriers To Entry
Key research owned by single firm
Government gives a firm the exclusive right to produce some good/service
Costs of production make a single producer more efficient than large numbers of producers
A firm can gain control of other firms in the market and therefore grow in size
Monopoly Resources
Firm owning a key resource
Example- owner of a well has a monopoly on water
Monopolists have much greater market power than single firms in competitive markets Monopolists can
charge high price for necessities like water
Exclusive ownership of a key resource is potential cause of a monopoly
Monopolies rarely arise because if this
There are few examples of firms that own a resource that has no close substitutes
Government created
monopolies
Monopolies happen as Government has given one person/firm the right to sell a good/service
Patent/Copyright laws are used by Government to create a monopoly to serve public interest
Eg:Pharmaceutical companies applying for a patent
European Kings used to grant exclusive licences to friends and allies to raise money
Governments can grant a monopoly as it’s viewed to be in the public interest.
In Sweeden-can control directly the sale of alcohol
Patents/Copyrights give 1 producer a monopoly
Higher prices occur
Privatization of alcohol would result in fatal accidents, suicides etc.
Laws on patents/copyrights have benefits and costs
Natural Monopolies
As markets expand, a natural monopoly can evolve into a competitive market.
Distribution of water
Pipes must be built by a firm in the town
Average costs of water are lowest if only 1 firm serves the entire market.
Economies of scale over range of output
A firm can produce a large amount of output at a low cost
An industry is a natural monopoly when a single firm can supple a good/servide to an entire market
Firms less concerned about new entrants which may threaten its monopoly power Monopolist’s profit
attracts new entrants into market
Market becomes more competitive
External Growth
Large firms grown partly through takeovers/merging and acquisitions
Industry becomes more concentrated
Firm may develop monopoly power over their rivals + use barriers to make it difficult for new firms to enter
Governments monitor acquisitions to notice any implications for competitions.
Example: In UK, any merger that gives a firm 25% or more of market may be investigated
Monopoly Vs Competition:
The main difference between a competitive firm and a monopoly is the ability the monopoly has to influence the price of its output. Competitive firms are small relative to the market in which it operates so it takes the price of its output as given by the market conditions. In contrast, because a monopoly is the sole producer in its market, it can change the price of its goods by altering the quantity it supplies to the market.
The following video link below describes what a monopoly is in simple terms and also the problems associated with it.
http://www.youtube.com/watch?v=b93mTVukuiE&feature=related
A Monopoly’s Revenue: Total Revenue = Quantity sold × Price Average Revenue = Total Revenue ÷ Quantity of output Marginal Revenue: A monopolists marginal revenue is always less than the price of its good and very different from marginal revenue for competitive firms. When a monopoly increases the quantity it sells, it has two effects on total revenue: more output is sold and the price falls.
Profit Maximization: How exactly do monopolistic firms maximize their profit? - They maximize profit by choosing the quantity at which marginal revenue equals marginal cost.
The Welfare Cost of Monopoly: A monopoly charges a price above marginal cost. This makes monopoly undesirable to consumers. The monopoly earns a profit from charging this higher price. This makes it desirable to the owners of the firm. A consumer surplus is consumers’ willingness to pay for a good minus how much they actually pay for it.
Examples of Monopolies: Iarnrod Eireann
Microsoft
American Telephone & Telegraph
Major League Baseball
Telkom Long Island Power Authority