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What is the source of its monopoly power? Do you think it seeks to maximize its profits? How would such a fee affect price and output? Do you think that such a fee would be appropriate? Why or why not?

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Suppose the government were to impose an annual license fee on a monopolist that just happened to be equal to its economic profits for a particular year.

BILATERAL MONOPOLY EXAMPLES FREE

A monopoly firm is free to charge any price it wishes.

What are the necessary conditions for a monopoly position in the market to be established?.

Explain the difference between the demand curve facing a monopoly firm and the demand curve facing a perfectly competitive firm.

Would you regard any of them as a monopoly? Why or why not? Could you use the monopoly model in analyzing the choices of any of them? Explain. Agricultural cooperatives must be authorized by Congress otherwise, they would violate laws against collusion in the marketplace.Ĭonsider the following firms. Some agricultural producers join producers’ cooperatives to exert some power over price and output.

BILATERAL MONOPOLY EXAMPLES PROFESSIONAL

Professional associations may seek to improve the economic position of their members by supporting legislation that reduces supply or raises demand. A bilateral monopoly results in a kind of price-setters’ standoff, in which the firm seeks a low wage and the union a high one. When a union represents all of a monopsony firm’s workers, a bilateral monopoly exists.

This goal can be accomplished by restricting the available supply or by increasing the demand for labor. Workers (sellers of labor), for example, have organized unions to seek better wages and working conditions. When there are a large number of sellers, they may band together in an organization that seeks to exert a degree of market power on their behalf. A factor can be sold by a monopoly firm, which is likely to behave in a way that corresponds to the monopoly model. Sellers can also exercise power to set price. A price floor (e.g., a minimum wage) can induce a monopsony to increase its use of a factor. The lower quantity and lower price that occur in a monopsony factor market arise from features of the market that are directly analogous to the higher product price and lower product quantity chosen in monopoly markets. The price paid by the monopsony firm is determined from the factor supply curve it is less than the competitive price would be. Less of the factor is used than would be the case if the factor were demanded by many firms.

The distinguishing feature of the application of the marginal decision rule to monopsony is that the MFC of the factor exceeds its price. Public policy toward monopoly includes antitrust laws and, in the case of natural monopolies, regulation of price and other aspects of the firm’s behavior.Ī firm that is the sole purchaser of a factor is a monopsony. Compared to a competitive market, the monopoly is characterized by more centralized power, potential higher profits, and less pressure to be responsive to consumer preferences. The profit-maximizing price is then found on the demand curve for that quantity.īecause a typical monopolist holds market price above marginal cost, the major impact of monopoly is a reduction in efficiency. It will maximize profits by producing the quantity of output at which marginal cost equals marginal revenue. Network effects for certain products further increase the market power that patents afford.īecause the demand curve faced by the monopolist is downward-sloping, the firm is a price setter. Potential sources of monopoly power include the existence of economies of scale over the range of market demand, locational advantages, high sunk costs associated with entry, restricted ownership of raw materials and inputs, and government restrictions such as licenses or patents. Monopoly occurs if an industry consists of a single firm and entry into that industry is blocked. This chapter has examined the profit-maximizing behavior of monopoly firms.