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Market structures

1. Discuss the barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?

2. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic?

3. Critically evaluate and explain each statement:
a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.
b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
c. An excess of price over marginal cost is the market's way of signaling the need for more production of a good.
d. The more profitable a firm, the greater its monopoly power.
e. The monopolist has a pricing policy; the competitive producer does not.
f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.
g. In a sense the monopolist makes a profit more than it does goods.

Solution Preview

1. Barriers to entry include:
a. Investment and research, or sunk costs - for example, huge investment requirements for new antibiotics that make it difficult for new firms to compete against the drug majors
b. Government regulations and patents, which lawfully restrict who can produce a good.
c. Economy of scale - Reduction in cost per unit resulting from output above a certain number. One reason for this is that overheads and other fixed costs can be spread over more units of output.
d. Customer loyalty - new firms can have difficulty starting in the face of existing firms that have many customers loyal to their products
e. Advertising - existing firms that spending heavily on advertising make it difficult for smaller competitors to exist long enough to realize a profit
f. Network effect - occurs hen a good or service has a value that depends on the number of existing customers. For instance, owning a phone becomes more valuable as more people are plugged into the telephone network.

Where there are economies of scale which are large in relation to the size of the market, monopolies are ...