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Chapter 15: Problem 1

What is a monopoly? Can a firm be a monopoly if close substitutes for its product exist?

Short Answer

Expert verified
A monopoly is a market state where one producer controls the entire supply of a unique product or service. It's possible, but less likely, for a firm to be a monopoly if close substitutes for its product exist. Its control over the market may be diminished due to the presence of these substitute products.

Step by step solution

01

Definition of Monopoly

A monopoly is a business term, defined as a scenario where a single firm or producer controls the entire market of a certain commodity or a service. In a monopoly, this single firm becomes the only provider of a particular product or service, meaning there is no competition. This can often lead to higher prices and lesser output quality as there is no incentive for this firm to effectively compete.
02

Understanding of Substitute Goods

Substitute goods in economics are goods which, as a result of changed conditions, may replace each other in use (or consumption). For instance, if the price of product A increases, consumers may start using product B, provided that B is a substitute for A.
03

Evaluating Monopoly in Case of Substitute Goods

A firm that controls all of a certain market, even if there are close substitutable goods, could still be considered a monopoly if consumers still prefer its product more than the close substitutes. However, it is important to note that if there are close substitutes available, the firm's market control will be lessened as compared to if no substitutes available. In essence, having substitutes can prevent a monopoly from maximizing profit by not allowing them to control the price arbitrarily.

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Most popular questions from this chapter

Draw a graph that shows a monopolist earning a profit. Be sure your graph includes the monopolist's demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit-maximizing level of output and price.

An article in the New Yorker noted, "The Bronx [borough of New York City] is home to 1.5 million people, two hundred thousand public-school students, eleven colleges and universities, and a single general-interest bookstore a Barnes \& Noble, located in the Bay Plaza shopping center." The article also noted that this bookstore closed at the end of 2016 . Would the only bookstore in the Bronx, or any other city, be considered a monopoly? If so, why would it have closed?

Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the gallon. Which method of pricing is more likely to result in economic efficiency in the water market? Be sure to refer to the definition of economic efficiency in your answer. Why do you think the same method of pricing isn't used by all cities?

Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 on page 83 and consider whether this definition applies to a monopolist.)

An article in the Wall Street Journal quoted a DOJ antitrust official as saying, "Mergers between substantial competitors, especially in already concentrated industries, can give companies far too much power over the markets in which they operate." a. What does the official mean by a "concentrated industry"? b. What does he mean by "power over the markets in which they operate"? c. The article also quoted the official as saying that mergers might benefit the public "when they bring together complementary assets, people and ideas that help lower production costs or spur greater innovation." Will these positive aspects of a merger always be enough to offset the negative aspects you discussed in answering part (b) of this problem? Briefly explain.
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