The pure monopolist seeks the output that will yield the greatest per-unit profit.

Chapter 12 - Pure Monopoly

12-1

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DISCUSSION QUESTIONS

1.

“No firm is completely sheltered from rivals; all firms compete for consumer dollars.

Therefore, pure monopoly does not exist.” Do you agree? Explain. How might you

use the concept of cross elasticity of demand to judge whether monopoly exists?

Though it is true that “all firms compete for the dollars ofconsumers,” it is playing on

words to hold that pure monopoly does not exist. If you wish to send a first-class letter, it is

the postal service or nothing. Of course, if the postal service raises its rate to $10 to get a

letter across town in two days, you will use a courier, or the phone, or you will fax it. But

within sensible limits, say a doubling of the postal rate, there is no alternative to the postal

service at anything like it at a comparable price.

The same case can be made concerning the pure monopoly enjoyed by the local electricity

company in any town. If you want electric lights, you have to deal with a single company. It

is a pure monopoly in that regard, even though you can switch to oil or natural gas for

heating. Of course, you can use oil, natural gas, or kerosene for lighting too—but these are

hardly convenient options.

The concept of cross elasticity of demand can be used to measure the presence of close

substitutes for the product of a monopoly firm. If the cross elasticity of demand is greater

than one, then the demand that the monopoly faces is elastic with respect to substitute

products, and the firm has less control over its product price than if the cross elasticity of

demand were inelastic. In other words, the monopoly faces competition from producers of

substitute products.

2.

Discuss the major barriers to entry into an industry. Explain how each barrier can

foster monopoly. Which barriers, if any, do you feel give rise to monopoly that is

socially justifiable?

Barriers to entry include; Investment, especially in industries with economies of

scale and/or natural monopolies. Government regulations may make entry more

difficult or impossible. In the extreme case, a government may make competition

illegal and establish a statutory monopoly. Requirements for licenses and

permits, for example, may raise the investment needed to enter a market.

5.

Critically evaluate and explain each statement:

a.

Because they can control product price, monopolists can guarantee profitable

production by simply charging the highest price consumers will pay.

b.

The pure monopolist seeks the output that will yield the greatest per-unit profit.

c.

An excess of price over marginal cost is the market’s way of signaling the need

for more production of a good.

d.

The more profitable a firm, the greater its monopoly power.

e.

The monopolist has a pricing policy; the competitive producer does not.

f.

With respect to resource allocation, the interests of the seller and of society

coincide in a purely competitive market but conflict in a monopolized market.

When a pure monopolist is producing its profit

How does a pure monopolist determine output?

How does a monopolist find its profit

What is a pure monopoly in economics?