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Lesson 7 - Monopoly and Monopolistic Competition

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31 views21 pages

Lesson 7 - Monopoly and Monopolistic Competition

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iced. tea
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© © All Rights Reserved
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MONOPOLY

AND
MONOPOLISTIC
COMPETITION
Gregory Mankiw
Monopoly is an economic situation where a single
company or entity has exclusive control over a
particular product or service in a market. This
means there are no close substitutes, allowing the
monopolist to set prices and control supply without
competition.
Characteristics of Monopoly

- Single seller
- Unique product with no close substitutes
- High barriers to entry
- Price maker vs. price taker
Types of Monopolies :

- Natural monopoly
- Government monopoly
- Geographic monopoly
- Technological monopoly
Types of Monopolies : (cont)
 Natural monopoly - A natural monopoly is a market
situation where a single firm can produce a good or
service at a lower cost than multiple competing firms due
to significant economies of scale. This typically occurs in
industries with high fixed costs and low marginal costs,
making it inefficient for multiple providers to operate.
Examples of Natural Monopolies

• Utilities (Water supply and electricity services)

• Public Transportation (Railroads in certain regions)

• Telecommunications( Local phone service in areas

with established infrastructure)


Types of Monopolies : (cont)

 Government monopoly - A monopoly occurs


when a government agency or entity is the
sole provider of a particular good or service.
This type of monopoly is established to
achieve specific social, economic, or political
goals, often in sectors deemed essential for
the public good.
Examples of Government Monopolies:

1. Postal Services-In many countries, postal


services are provided exclusively by government
agencies.

2.Public Transportation- Many cities have


government-run public transit systems that
provide bus and rail services.
Examples of Government Monopolies: (cont.)

3. Utilities- In some areas, water supply and electricity


may be managed by government entities, especially in
regions where privatization is not feasible or
desirable.

4. National Defense- The military and defense services


are typically government monopolies, as they are
essential for national security
Types of Monopolies : (cont)
❑ Geographic monopoly- Occurs when a specific company or
entity is the sole provider of a product or service within a
particular geographic area. This type of monopoly often
arises due to the unique characteristics of the location,
which can limit competition.
Examples of Geography Monopolies: (cont.)

1. Rural Utilities- In many rural areas, a single utility


company may provide electricity or water services
because the population density is too low to support
multiple providers.

2. Local Cable Providers- In certain towns, one cable


company may have exclusive rights to provide service,
limiting competition.
Examples of Geography Monopolies: (cont.)

3. Local Gas Stations- In very remote areas, a single


gas station may be the only option available for fuel,
creating a geographic monopoly.

4. Public Transportation-In some regions, a single public


transit agency may operate due to the area's size and
demand.
Types of Monopolies : (cont)
 Technological monopoly- A occurs when a company has
exclusive control over a particular technology or innovation
that is essential for producing a product or providing a
service. This type of monopoly can arise due to significant
investment in research and development, patents, or
proprietary technologies that create barriers for
competitors.
Examples of Technological Monopolies:

1. Pharmaceutical Companies- A company may hold a patent for a new


drug, giving it exclusive rights to produce and sell that medication for a
certain period.
2. Software Companies-Firms like Microsoft initially held a technological
monopoly in operating systems with Windows, as their technology was
widely adopted and integrated into various hardware.
Examples of Technological Monopolies: (cont.)

3. Telecommunications- Companies that develop proprietary technologies


for communication systems, such as certain types of network
infrastructure, may establish a technological monopoly.

4. Semiconductor Manufacturers- Companies that create specialized chips


for computers and electronic devices can hold monopolies if they develop
unique, advanced technologies that competitors cannot replicate.
Monopolistic Competition

Refer to a market structure characterized by many firms


competing against each other, but each firm sells a product
that is differentiated from its competitors. This differentiation
can be based on quality, features, branding, or customer
service.
Key Characteristics of Monopolistic Competition:

1. Many Sellers- There are numerous firms in the market, each


offering a slightly different product.

2. Product Differentiation- Each firm's product is not identical;


instead, firms differentiate their offerings to attract consumers
(e.g., through branding, quality, or features).

3. Some Price Control-Firms have some control over their prices


because of product differentiation, but they are still influenced by
the prices of competitors.
Key Characteristics of Monopolistic Competition: (cont)

4. Free Entry and Exit- New firms can enter the market easily, and existing
firms can exit without significant barriers, leading to a more dynamic
market.

5. Non-Price Competition- Firms often compete through marketing,


advertising, and improving product quality rather than solely on price.
Examples of Monopolistic Competition:

1. Restaurants-Numerous restaurants offer various cuisines and


dining experiences, each with unique menu items and
atmospheres.
2. Clothing Brands-Many brands sell similar apparel but
differentiate themselves through style, quality, branding, and
pricing.
Examples of Monopolistic Competition: (cont.)

3. Beauty Products- Companies produce a wide range of cosmetics


and skincare products, each with unique formulas and branding.

4. Consumer Electronics- Different brands offer smartphones,


laptops, and other electronics with varying features and designs.
END!

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