178 Why It Matters: Monopoly
Why analyze a firm’s profit maximizing strategies under conditions of a monopoly?
If perfect competition is at one end of the competitive spectrum, at the other end is monopoly. Mono means one. A monoplane is an aircraft with one wing. A monocle is a single eyeglass. Monopoly is a single supplier, the only firm in an industry. Monopolies have monopoly power, which is the ability to set the market price.
As you work through this module, think about the following questions:
- What prevents a monopoly from charging an infinite price?
- What is similar about the model of monopoly compared to perfect competition?
- What is different about the model of monopoly compared to perfect competition?
There are more industries which are monopolies than are perfectly competitive, but examples of pure monopoly are still hard to find in the U.S.. Google is not a monopoly. Nor is Microsoft or Amazon.com. Still we can learn a lot about how those firms operate by understanding the model of monopoly. Your local power company is a monopoly, but it doesn’t operate exactly the way this module explains. How do we explain this anomaly? Let’s find out.
LEARNING OUTCOMES
- Define the characteristics of a monopoly
- Define and explain the sources of barriers to entry
- Calculate and graph a monopoly’s fixed, variable, average, marginal and total costs
- Explain why a monopoly is inefficient using deadweight loss
- Analyze different strategies to control monopolies, including natural monopolies