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A monopoly represents one of the most extreme market structures in economics, characterized by a single seller dominating an entire industry without meaningful competition.
How it works
How the practice works.
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Characteristics of a monopoly
- Single producer/seller
- No close substitutes
- High barriers to entry
- Price maker ability
- Downward-sloping demand curve
Monopoly process
Operate differently from competitive markets:
Profit maximization mechanism
Monopolists maximize profits by producing at the quantity where marginal revenue equals marginal cost (MR=MC).
Maximization process:
- Determining the output level where MR=MC
- Setting the price according to what consumers are willing to pay for that quantity
- Earning economic profits in the long run due to barriers preventing competitor entry
Price Discrimination Strategies
- First-degree: Charging each customer their maximum willingness to pay.
- Second-degree: Pricing varies by quantity purchased.
- Third-degree: Segmenting markets based on characteristics like age, location, or time of purchase
Barriers to entry
- Legal barriers:
- Control of essential resources:
- Economics of scale:
- Network effects:
- Deliberate exclusionary practices:
Why it is a problem
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Point 1
Point 2
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A monopolistic market is often harmful to consumers. A monopoly inherently does not have competition, since there is no other party to compete. The monopoly can therefore fix prices as they wish, with no one to compete for lower prices. This often leads to ridiculously high prices and is harmful to consumers.
Examples
Some examples of Monopoly include:
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Ticketmaster is often referred to as a monopoly of live events.
References
