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Chapter 15: Problem 6

An article in the Wall Street Journal, discussing large hightech firms such as Amazon, Microsoft, and Google, stated, "Today's high-tech giants may not be monopolies in the most classic sense.... [Demand] for technology products and services keeps increasing.... That leaves a lot of potential upside for a small group of big players that already have demonstrated that scale matters." a. Why would high-technology firms not be considered monopolies in the "classic sense"? b. Why would the article state that for the most profitable high-technology firms, "scale matters"?

Short Answer

Expert verified
High-technology firms do not fit into the 'classic' definition of a monopoly as they operate in an oligopoly rather than having absolute control over the market like a monopolist. Although they own large portions of their respective markets and have significant influences, there are other competitors in the market offering similar products and services. As for the statement that 'scale matters' for these firms, it refers to the principle of economies of scale. As these companies are able to scale their services to a large number of users without a significant increase in cost, they are able to achieve larger profit margins.

Step by step solution

01

Understanding Monopolies in the Classic Sense

In the classic sense, a monopoly is defined as a market structure characterized by a single seller, selling a unique product with no close substitutes. In this market structure, the monopolist has full control over the market price by adjusting the quantity supplied. However, while large tech firms like Google, Amazon, and Microsoft occupy substantial portions of their respective markets, they are not the sole providers. There are other companies providing similar services and products, making the market not a pure monopoly but oligopolistic in nature.
02

Understanding Why Scale Matters

Scale in the context of a business typically refers to the concept of economies of scale, which means that as a company grows and production levels increase, the cost of producing each unit decreases. This is particularly true in the high-tech industry. Once the infrastructure and platforms are developed, companies like Amazon, Google, and Microsoft can add new users or sell additional units with relatively low costs. This increasing return to scale allows them to deliver more value to consumers and capture a larger portion of the market, thereby leading to higher profit margins.

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Most popular questions from this chapter

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