In this lecture we learn the important concept of a "monopoly". Readers of the New Testament in Greek will know what a “monopoly” is by its roots: “monos” means one, and “polein” means “to sell.” A monopoly is only one seller in an industry. Examples are the United States Postal Service for regular mail, many local power companies for your gas or electricity, your cable television provider and, to some extent, your local public school system. Monopolies arise for a variety of reasons.
There are "natural" monopolies, where an industry has increasing economies of scale, such that long-run average costs of production decrease, like power companies or railroads. There are "barriers to entry" that prevent new competition, because it is so expensive to start a new railroad from scratch (nothing). There are monopolies created by government regulation (the Post Office) or by laws (copyright law is one cause of the Microsoft monopoly) or perhaps even by illegal behavior (Microsoft was found to have violated laws against anti-competitive behavior).
Thousands of companies enjoy market power that are, in effect, monopolies. Microsoft is the most profitable example. It has over 90% of the market for computer operating systems, which is the software needed to make your computer work. Microsoft’s operating system is called “Windows”. There are other operating systems available (such as Linux), but they have small market share and Windows has nearly a complete monopoly.
Perhaps the most famous monopoly of all time was John D. Rockefeller’s “Standard Oil,” which controlled most of the oil industry in America around 1900.
What do all these monopolies have in common? In their heyday, they made extraordinary profits. Microsoft still does.
These monopolies were able to garner enormous profits for one simple reason: they had no competition. As a monopoly increases its price, there is no other company to take customers away from it with a lower price. If Microsoft increases (or fails to reduce) its price on Windows, there is almost nothing the consumer can do about it except pay. If you want a computer that is compatible with all the other computers out there, then you will likely buy Windows even if overpriced.
Is the monopoly able to increase its price without limitation? No. The Law of Demand still applies to monopolies: demand will decrease as the price increases simply because people will buy less as the price increases. People have limits on what they will spend. Even a monopoly has to live with the demand curve. The marginal revenue is not always positive as price increases, even for a monopoly. At some high price, a further increase in price causes a larger drop in quantity and the marginal revenue goes down. A monopoly does not increase its price when further if its marginal revenue falls declines to equal its marginal cost.
== Monopoly ==
A monopoly is defined as a firm that is the only seller in a market, such as the company that supplies electricity to an area. That firm has complete control of its market. There is no supply curve in this market. But note that while the monopoly is the only seller, there are still many buyers: the public. So there is a demand curve just as before.
A monopoly is more profitable without competitors than a an ordinary firm is in a competitive market. A monopoly is like a football team playing a game without an opponent. The team still has to score touchdowns, but it is so easy to do so.
A monopoly increases its profit by increasing prices, which it can do because there is no competition, and no substitutes. A monopoly reduces its output when it increases its price, as fewer people buy the good due to the Law of Demand (higher price, less demand). As a result, a monopoly produces less output than the efficient quantity, or (less than the equilibrium level of output in a competitive market).
If you have played the board game called "Monopoly", you might have noticed that the rents on property increase enormously when someone has all two or three properties in a "color group." The player monopolizes property and then obtains much higher rent because it. The player who monopolizes the most property is usually the one who wins. In business, monopolies are the most profitable companies.
==How Monopolies Arise==