Monopoly
...e. A monopolist may concern a question: Does the firm have the ability to keep prices high, earning supernormal profits while keeping potential competitors out? The answer is yes for a monopoly firm because a firm with a small market share cannot charge supernormal prices, because its competitors will generally find it very easy to bid away its customers. A firm with a large market share may have an advantage, because its competitors may not have the production capacity to take over from it. One example is that Microsoft ends up dominating the computer world. Microsoft operating systems account for approximately 90-95% of microcomputer computer operating systems. Microsoft's Windows operating system has become the de facto standard for home and business computer applications. It is fairly clear that Microsoft is the dominant firm in the market for computer operating systems. The next issue is that there are barriers to entry into the monopoly firms. These are the barriers to the expansion of existing competitors. For many amount of monopoly power to continue to exist in the long run, the market must be closed to entry in some way. Either legal means or certain aspects of the industry’s technical or cost structure may prevent entry. These are necessary for the containment of supernormal profits. Without barriers, supernormal profits would induce entry or expansion of competitors. Barriers to entry include patents, exclusive licenses, the total possession of ace source of raw material, economies of scale, and capital market imperfections, which result in different firms being charged different rates of interest for comparable risk. A patent is a government license that gives the holders the exclusive right to exploit a produce or process. Barriers to entry do not include previous investment, including an investment in reputation or customer loyalty. Fierce competition among producers in an industry is never a barrier to entry. In the example in Mexico, under the terms of a 1995 Mexican telecommunications law, this company, Telmex, is a regulated monopoly. A government agency is charged with regulating the company’s rate of return. The price elasticity of demand for the monopolist depends on the number and similarity of imperfect substitutes. The more numerous and more similar are these imperfect substitutes, the greater the price elasticity of demand of the monopolist's demand curve. The monopolist faces a downward-sloping demand curve. Since the monopolist is the only firm in the industry, the market demand is the demand faced by the firm. The monopolist must take the market demand as a given since they can not force consumers to buy their product. The monopolist can set the price or the quantity, but not both. Once either is chosen, the demand curve defines the other. This means that it cannot charge just any price with no changes in sales because, depending on the price charged, a different quantity will be demanded. Economic profits are neither necessary nor sufficient to prove monopoly power. To see why they are not sufficient, profits may well be positive in any industry, which is not in long-run competitive equilibrium. To see why they are not necessary, a monopolist, who is not constrained by market forces to be efficient, may sacrifice efficiency, preferring to close the shop early some days or hire her incompetent brother-in-law. This is a privilege reserved for monopolists. In the monopoly situation, in the short-run, the firms can make positive, zero, or negative profit. In the long-run, the firms can make positive or zero economic profit. In a monopoly firm, monopolists try to maximize the profits. First, profit maximization involves maximizing the positive difference between total revenues and total costs. For any given demand curve, in order to sell more, the monopolist must lower the price. Second, profit maximization occurs where marginal revenue equal marginal cost. This is true for a monopolist as it is for a perfect competitor, but the monopolist will charge a higher price. Third, what price to charge an output is always a question to ask. The basic procedure for finding the profit-maximizing short-run price-quantity combination is first to determine the profit-max...