Unit 6 — Monopoly

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Purpose:

To help viewers understand that the degree to which a firm controls the market affects prices and economic efficiency, and that the government tries to prevent or regulate monopolies.

Objectives:

  1. Market power is directly related to the producer’s ability to control the total production of a product and therefore keep prices and profits high.

    1. At one extreme monopolists can control total output and therefore keep prices high—they are the price makers.
    2. At the other extreme, in perfectly competitive markets, sellers have no control over prices—they are price takers.
  2. The concentration of market power depends on entry barriers, such as:

    1. Ownership of a resource (e.g., oil) or process (e.g., patents on Polaroid film) or transportation or marketing outlets.
    2. Economies of scale (e.g., the large fixed costs necessary to start a telephone company). Some markets, such as those for local utilities, have such large economies of scale that they are “natural monopolies.”
    3. Even if entry barriers are high, some firms may try to compete with monopolies because the level of the monopolist’s profits is so high.
  3. The more concentrated market power is in a given market, the higher the likelihood that it is operating in a way that is economically inefficient for society as a whole. Producers with a high degree of market power are likely to set prices at a level that is higher than the level that would prevail in perfectly competitive markets and produce less than would be produced in a perfectly competitive market. From society’s point of view, this is not economically efficient.
  4. The government tries to minimize or control monopolies:

    1. If the market is not a natural monopoly, a monopoly may be dismantled by antritrust action.
    2. In the case of natural monopolies, the government will regulate the firm.

Audio and Transcripts

Meet the Series Experts

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David Boies

David Boies

Prominent attorney involved in many high profile cases, including United States v. Microsoft, during which Bill Gates said that Boies was “out to destroy Microsoft” but the Washington Monthly called him “a latter-day Clarence Darrow.”

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Henry Geller

Henry Geller

Telecommunications attorney and law professor specializing in United States communications policy-making and regulation.

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ECONOMICS IQ?

  1. A monopolistic firm is MOST likely to do which of the following?

    Restrict output below socially desirable levels.

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  2. The monopolist can set a price well above the competitive supply and demand level by...

    restricting output.

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  3. A firm that is given exclusive rights by the government to provide a particular service in a particular area is BEST termed...

    a franchise monopoly.

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  4. A natural monopoly is MOST likely to occur whenever...

    production costs decline with output.

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  5. The regulatory agency is likely to establish a maximum price of...

    chart chart

    The commission will set the maximum price at the level where the average cost curve intersects the demand curve.

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  6. Which of the following statements is probably MOST accurate?

    Given the diversity of interests and needs, some combination of market structures is probably the most efficient means of promoting technology.

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Glossary

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