ECO561 Economics WEEK 3 DQV


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This chapter is divided into six basic sections: the characteristics of pure monopoly; the barriers to entry that create and protect monopolies; price and output determination under monopoly; the economic effects of monopoly; price discrimination under monopoly; and the regulation of monopolies.

 The discussion of barriers to entry states at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly.

 The discussion of price output decision-making by monopoly firms points out that the marginal-revenue–marginal-cost rule still applies.  Emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly.  The misconceptions about monopoly pricing behavior are presented as well as a comparison of efficiency in pure competition and pure monopoly.  Additionally, the author presents a discussion of the effects of monopoly power in the U.S. economy and some policy alternatives.

 The case of price discrimination and its effects are discussed along with the conditions necessary for it to occur.  At the end of the chapter, the basic issues involved in the regulation of public service monopolies are reviewed.



Pure competition and pure monopoly are the exceptions, not the rule, in the U.S. economy.  In this chapter, the two market structures that fall between the extremes are discussed. Monopolistic competition contains a considerable amount of competition mixed with a small dose of monopoly power.  Oligopoly, in contrast, implies a blend of greater monopoly power and less competition.

 First, monopolistic competition is defined, listing important characteristics, typical examples, and efficiency outcomes.  Next we turn to oligopoly, surveying the possible courses of price, output, and advertising behavior that oligopolistic industries might follow.  Finally, oligopoly is assessed as to whether it is an efficient or inefficient market structure.


The entrepreneur is an initiator, innovator, and risk bearer–the catalyst who uses resources in new and unique ways to produce new and unique goods and services.

 Other innovators, who do not bear personal financial risk, include key executives, scientists, and others engaged in commercial R&D activities.

 Often entrepreneurs form new companies called “start-ups”, i.e., firms that focus on creating and introducing new products or employing a specific new production or distribution technique.

 Innovators are also found within existing corporations supported by working conditions and pay incentives that foster creative thinking.  Some firms have chosen to “spin off” the R&D function into new, more flexible and innovative companies.

 Product innovation and development are creative endeavors with intangible rewards of personal satisfaction, but the “winners” can also realize huge financial gains.

Success gives entrepreneurs and innovative firms access to more resources.  The entrepreneurs are found in many different countries around the world.

 Technological advance is supported by the scientific research of universities and government sponsored laboratories.  Firms increasingly help to fund university research that relates to their products.

 Class, take a look and try the following.

 Based on your readings from the chapter, listed below are several possible actions by firms.  Write “INV” beside those that reflect invention, “INN” beside those that reflect innovation, and “DIF” beside those that reflect diffusion.

a.   An auto manufacturer adds “heated seats” as a standard feature in its luxury cars to keep pace with a rival firm whose luxury cars already have this feature.

b.   A television production company pioneers the first music video channel.

c.   A firm develops and patents a working model of a self-erasing whiteboard for classrooms.

d.   A lightbulb firm is the first to produce and market lighting fixtures with halogen lamps.

e.   A rival toy maker introduces a new Jenny doll to complete with Mattel’s Barbie doll.



According to DeMarco (2001), it is a common view that monopolies are not only economically objectionable, they are also ethically objectionable.  Operating like a command-like structure, the monopoly blocks competition and distorts the markets natural mechanism’s such as the ability to self-organize and self-correct.

 As we have learned in previous business courses, economic efficiencies, low costs, and market freedoms demand competition.  If this is truly the case, then monopolies, by there very definition, are anti-competitive and therefore not able to provide efficiency, low cost, or market freedom.  If we look at Manuel Velasquez’s Business Ethics:  Concepts and Cases, Mr. Velasquez argues that with competition comes justice and with justice, efficiency.  So if monopolies reduce competition, then monopolies harm justice and thereby hinder efficiency (DeMarco, 2001).

 But what if monopolies were not necessarily economically abhorrent.  What if the argument for the relationship between competition and justice was questionable?  Are there advantages to a monopoly?

 DeMarco, C. W. (2001). Knee Deep in Technique: The Ethics of Monopoly Capital. Journal Of Business Ethics, 31(2),