TAILIEUCHUNG - Microeconomics for MBAs 39

Microeconomics for MBAs 39. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 12 Monopoly Power and Firm Pricing Decisions The essential condition for competition is freedom of market entry. In perfect competition entry is assumed to be completely free. Conversely the essential condition for monopoly is the presence of barriers to entry. Monopolists can manipulate price because such barriers protect them from being undercut by rivals. Barriers to entry can arise from several sources. First the monopolist may have sole ownership of a strategic resource such as bauxite from which aluminum is extracted . Second the monopolist may have a patent or copyright on the product which prevents other producers from duplicating it. For years Polaroid had a patent monopoly on the instant-photograph market. Eastman Kodak developed an alternative process but was forced to withdraw its camera from the market when a Federal court ruled that it infringed on Polaroid s patent. Third the monopolist may have an exclusive franchise to sell a given product in a specific geographical area. Consider the exclusive franchise enjoyed by your local telephone company or was enjoyed until very recently your local electric utility. Fourth the monopolist may own the rights to a well-known brand name with a highly loyal group of customers. In that case the barrier to entry is the costly process of trying to get customers to try a new product. Finally in a monopolized industry production may be conducted on a very large scale requiring huge plants and large amounts of equipment. The enormous financial resources needed to produce on such a scale can act as a barrier to entry because a new entrant operating on a small scale would have costs too high to compete effectively with the dominant firm. All in all these external barriers to entry can be thought of as costs that must be borne by potential competitors before they can complete. Such barriers may be low which means that a sole producer s monopoly power may be very limited but such barriers could theoretically be .

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