Monopoly

'e've talked enough about perfect comPetition'

;;Jffi #;.ffi Hfiilff :,ll;il,i:i,i^,i;ii;1ffi

tr3.T;J:::l'r,ir'"l"""nur,"rs,

,* Nt"1#l'Xii: ir!,op".i".' such as noarail]r;1.f :::'l:::' ;it: H:::"r.t;; f,,":,1ilHi:ilffi H#i*/;!i::y*r:SJ,:":,:'"S"J"tJi:-1",::l* the big kids' we'll see how this game ii plaved bv
LL{RNING OBJECTIVES *'ll look at these toPics:
L The graPh of the monoPolist'

:::::,.:'T:jj";,Hffij;$i';fl :ff: ffi :fiy..i"J:IT#'la'a"il**:r",:gll:-:'#"nf""?-'.Ik:::i:"'i""1

;JJH:tt:il;i:ffi ;;;;i;'ro"'r'Te"'r""i:1T3::Y::^Y:,::::fii j:i: l:-*;:'ilffi'ffi ;#;;;;;'*""p'ii"i"":f:*:::::,:,"'"-i:-11i:*: ;;"'""?*rr."tiu:l'-1iy:t:^'j11"^:"":iT1"i:'I;n:fi

1 11":'^:f:::*:'iit*ti,1t:::

:-'""

4. Barriers to entry'
5. Limits to monoPolY Power' 6, Economies of scale and natural
monoPolY.

How-the monoPolist's Profits are

calculated.

e fn" *oroPolist in the short run and

fu

long run.

?, What makes bigness bad?

hlonopolY I)efined
lmropolyistheonlyfirminanindustry.There,snobodyelsesellinganythinglike &e monoporist r- p"J'"i"g,in other-woro:ll5: the f":l::l:lTtliXl"i" comrocar gas and electric aiu*ona', "o**"'::'.'*'"::*Y::Y.YI#;'13#;,fTJ; -o*punv orAmerica) arso had es. and your local 0n.," "t*r'"* i:;i'g

J,ffiil"3;ffiffiffi:ffi;";;;r, ftHL''""J |!:#Jffi;;;;fit ffi;;i;iltil

HJIiro,

f:

monoPolY is'a fir-rn, that prodrrces all thc outPut tn an industrv.

is a reasonably npolies. Surely a Cadillac Seville photocopying machine' arJirany close substitut", f* u Xerox dnental. Further, ttrere gas' electricity' and local phone calls' for diamonds' ftere are no close 'uU'tiiui"*-I * close suistitutes for the monopolist's goods or to ask why $.e need or is there
,jrces.

from being need to be to disqualify firms ask how close substitutes would substitute for a Lincoln close

what ilre closs substitates'l

"' ""*"f|, rhs to entry later in the chaPter'

to keep out potential competitors, ".r. Has the monopolir;;;""d turri"r. about L" *onopoti't is the sole producer? We'Il talk other explanation 235

236

CHAPTER

1O

and have be the only doctor in 'rr"-ii"i"i,v Stofe, gfocery, drugstore, or dry cleao700,000 doctors in the United States. A hardware but each may have several competitors ers may have a .nonopoiv'in iis neighborhood, within a t'ew miles.

Weshotrldalsodistinguishbetweenlocalandnationalmonopolies.Someonema-v a local monopoly, but there are more than

The Graph of tlte MonoPolist

'trlre rlistiagui:i!li1 g r.;il;rl*cterlsiic +f i r:rperi'*et c$mPr-'f i tlon

competition is that the firm's demand cun'e The distinguishing characteristic of imperfect

isnolongeraperfectlyelastichorizontullin";nowitcurvesdownwardtotheright.This to lower price to sell more'. means th-e implrfect competitor will have talte t, we,ll draw our fouistandard curves: demand, marginal Using the data in

First, filI in Table 1 and check your figures revenue, marginal cost, and average total cost. pl"ur" o6r".r" that the demand and marginal revenue schedules against those in Tabte 2. no longer coincide.

Margi*al .ost iir lhe a'Jditioni:i c*lt *l i:rtducirig one li1*re il*:l
.

AcommonmistakestudentsmakewhenfillingoutTablelistousesomenumber (inthiscase,20)forMCatoneunitofoutput.We,llreviewexactlywhatMCis;theg of output' we'll see why there's no way of finding MC at one unit marginal cost? MC is rhe *4ditktn*l citst tt!'strodu'Do you recall the definiiion of
it;-v

fixed cost stays the ore t*rt'r Lts'tit,$ r;;;;*,. Remembei that as output rises'

same

{}i' (iu1t)tt.

andvariablecostrises.sofar,sogood.Theonlyp'obl"'niswedon,tknowhowmuch how much varilble. fixed cost is at one unit of output] nor do we know "":: :- 1,::: of output would be total cost at output one mlnus orri, of output. The MC of the liist unit puts,wecatlf,gureoutMCbecauseweknowhowmuchtotalcostrises.Nowusethe EffiEErc
, -^

output zero? It,s fixed cost. But u.e total cost at output zero. How much is total cost at output one' For the remaining outdon't know flxed cost, ,o *" "u"'' figure out MC at

for a MonoPolY Total Marginai Totai outDut Price Revenue Revlnue Colt
I
2
J

ATC

MC

$16

l5
14
13

4
5

$20 30 36 42 50 63 84

12
11

6
7

10

If,*ffiro

f,or a MonoPolY
Total

Marginal
Revenue $16
14

Output
1

Revenue

Total Cost

ATC

MC

Total

Profit

2 3

4
5 6
7

$16 15 t4 13 t2 11 10

$16 30 42 52 60 66 70

t2
10
8

-$ 4 $20 $20 0 30 15 $10 36t266 10 42 10.50 6 5010810 3 63 10.50 t3 2l -14 84 12

Monopo/y

,]
_-: '

'j,

_..j'

: _'
.

ili

Output

' -.rl 1 : '.1,1.1Jp{ili5t lr,Sakilig * f}r',1ri *:: :-:nopolist will rnake a profit if fbr some range of output her AIC lies below her clemand ::-j.re. the monopolist maximizes her profit at fi\,e units of output chargtng a price ol.912.
-

curve. ln this

1 to draw a graph of the D. MR, MC, and AIC cur.ves of :nonopolist. Remember to use graph paper. Look at the graph you drew and see whether it matches the one in Figure 1. The ---c and MC curves are the same as they were for the perf'ect competitor. I hope your ,il :ntersects your ATC at its minimum point. Aiso note that the demand and marginal -: riru curves slope downward to the dght. At one unit of outpnt, the demand and

r:

,-: ]'ou've written in Table

--sinal

revenue.curves share the same

point-$16-but

the MR curve then slopes down

----'h faster. In fact, when the demand curve is a straight line, the marginal revenue curve , .-so a straight line that falls twice as quickly. If you want to know why. take a look - -le box, "Why the MR Curve Declines Faster than the Den"rand Curve."

ln Table 2, when the output is one, price is $16; but to

seil two units of autput, the seller rnust lower price to S15. Two units at $15 equals $30 (total revenue), Notice rhat the seller can't charge $16 fbr the first unit and $15 ibr the second. That's because the seller has to post one price. (If the seller manages to charge more than bne price. we have price discrimination, which we'll talk about in the rext chapter.) When price is lowered to $15 total revenue is $30. -\'larginal revenue is $14 (toral revenue of $30 ar rwo units of output minus total revenue of $16 at one unit of output). At two units of output, because we charge a

$14 on the demand curve and $12 on the MR curve. Let's summarize. If the selier lowers price to sell more output, the pricc is lowered on all units of output. not just on the last one. This drives dowrr MR taster rhnn price (which is rcad off the demand curve). Note also that the MR cuwe descends twice as quickly as the D curve.

price of $1-5. the poinr on rhe demand curve is $15. So. at two units of output. we have $15 on the dernancl curve aud $14 on the MR curve. Tc sell three units, the sellel rnust lower price to $14. That yields a total rcvcnue of $42 and an MR of $!2 ($42 - $30). So. at rhree units of oulpur, we're ar

238

CHAPTER

10

When the demand curve falls $l to $15 at two units of output, the MR curve falls the MR $2 to $14. At three units of output, when the demand curve falls $1 to $14' curve falls $2 to $12.

Calculating tlte Monopolist's Proft

At what output does the
nrofiopolist produce?

Now we'll get down to business. At what output does the monopo_list produce? Go
ahead and

pirform the marginal analysis to determine the most profitable output' I'll tell you the first step. Look at Figure I and find the point at which your marginal cost curve crosses your marginal revenue curve. That's your output. Do your calculationS right here:

According to Figure 1, MC equals MR at 5 units of output. Using the formula ffr, total profit' we

find:

Total profit

: : :

,n_-:-(Price

ATC) X OutPut $10)

($12
$10

$2x5

Every firm produces where

MC:

MR.

We have a conflict here that didn't exist under perfect competition. The perfect competitor produced at the most profitable ouq)ut, which in the long run always happened to Ue ttre most efficient output. But we see that the monopolist does not produce where output is at its most efficient level (the minimum point of the ATC curve). Remember, eviry firm will produce at its most profitable output, where MC equals AtlR' If that does not happen to be the most efficient ouQut and if, for example, that firm is a bakery-get reaay ior a terrible pun-then that's the way the cookie crumbles' Finding the monop olisi,s pfice anit output'rs a'iittre'narbertnanfrntinrg'hrepn-r;arL'trdrprf"rrtri"hn-yfr.r* competition. If you need more practice, see the box, "How to Find the Monopolist's Prioe
and Output."

In the long run, the monoPollst

makes a profit, but the Perfect competitor does not.

1, let's compare the price of the monopolist with that of fu perfect competitor. In the very long run the perfect competitor would charge $9'90, tte .rrinir.rorn point of its ATC curve, while the monopolist's price is $12. Next' let's comparc output. ThL perfect competitor would produce at an output of 5.5, which is where Af,C is at its minimum, but the monopolist's output is 5. To summarize, the monopolist makes a profit, whereas in the long run the perfecr competitor makes no proflt. The monopolist operates at less than peak efficiency, while the perfect competitor operates at peak efficiency (the lowest point on the AtrC curve)finatty, the perfect competitor charges a lower price and produces a Iarger output th'n

loofing at Figure

the monopolist.r

competition would be larger than it would be under monopoly' I haven't bothered to distinguish between the short run and the long run mainly because the monopolist has no rivals. With.perfect competition, the fact that the firms entered the industry (attracted by profits) or left the industry (driven out of business by
rln theory, the perfect competitor produces 5.5 units and the monopolist 5. But because the perfect competir its output with that of the monoprilist, who produces the industry's r"^tty "onp*" when *"-r"y th" perfect competitor worrld produce_an outputof 5:5,. we must realize th entire o'utput. Thus,"*'t
the firm would no longer be a plrfecfcomPtitor. Do you fotlow this? a footnote.

This last,point bears some explanation. The monopolist oPerates on a much larger scale than does the individual perfect competitor. But the sum of output urider perfed

i;; u"y';"",\il"

If

you don't, don't worry' This is only

FIow to Find the Monopolisr,s Price and Output

f et's go over how the monopolist sets price step-by_ J-.lstep, using Figure l. Step l: The monopolist chooses h output by finding where the MC and MR curves cross. $tep 2: By moving down along the dashed line, we find iet the output she chose is 5. Step 3: We move up the dotted line from MC : MR
the demand curve. Step 4: We move horizontally along

16

14
12

fre dotted line ro a price of $12. Here's another one for you to work out. How much is &e output and price of the monopolist represented by
Egure A?

^10 e
o.

; .94

qve,

If we move down from where the MC and MR curves cnoss, we find that the output is 20. To find price we go !pfum where the MC and MR curves cross rtthe demand
and then horizontally to the price axis. This gives
$9.

rs a price of

15 20 25
Output

30

Figare

bs.ses) made the short run differ from the Iong run. under monopoly, even larger profits muldn't attract rival firms; otherwise, there would no longer be a monopoly. If a rnonopdy were losing money, in the long run it, too, would go out of business.

Reuiezu of tbe Monopolisti Economic Analysis

and graph. (For extra help, see the box, ..How to Read a Graph.") l{icroeconomics is based largely on the three-step problems you've come to know and

't

I've thrown a lot of new stuff at you, so let's step back for-a few minutes and review
monopolisj's lable

rpond to t}re data in Table 4.

kne: (1) filling in the table, (2) drawing the graph, and (3) doing the analysis. You may begin by filling in Table 3 and then seeing whether your numbers corre-

Output
I
2

Price
$21

Revenue

Total

Marginal
Revenue

Total Cost

ATC

MC

20

$30 40
48 57 70 93

l9
t8 t7
16

4
5

&l

Next comes the graph. Draw the demand, marginal revenue, marginal cos[, and average cost curves on a piece of graph paper. Then check your work with that in Figure 2. 239

Hornr
A*+How much is the output of the monopolist shown in Figure B? Write down your answer. Next question. How much is price? Again, write down your answer. Finally,
how much is total profit? Work it out in the space here.

to Read a Graph
:

et's go over some of the points we've already covered.

Did you notice that once we find output (where MC

MR), everything else lines up? Price is located on the

demand curve above the output of 4.2. ATC is on the ATC curve, also above an output of 4.2. When we find totd profit, we plug price, ATC, and output into our formulf,

16 14

We'll go over each of these questions in tum. First, ozr output is alwctys determined by the intersection of the MC and MR curves, That occurs at an output of about 4.2. How much is price? Price is read off tlte demand curve- Where on the demand curve-at what output? At the maximum profit output we just found 4.2. How much is price at that output? It appears to be about $9. And how much is ATC? Go straight up from where MC crosses MR to the ATC curve. It looks like about $7.50. Next we calculate total profit.
Total profit

12

t0

g
o-

88
6

: :

(Price

ATC)

Output
3

= ($9

- $7.50) x $1.50 x 4.2

4.2

$6.30

T;gurcn

Are you ready to do some analysis? we need to find the monopolist:s total pfoftDo that right here. Then check your work with the calculations that iollow.

Toral profit

:$3x5 : $ls

_ ATC) x Oueur ($tz - $l+; x

(price

240

['m not going ro ]et you off the hook just yet. Try these three questions l. At what.output would the firm produce most efflciently? 2. At what output would the perfect competitor produce in the long run? 3. What price would the perfect competitor charge in the long run?

Monopoly Figare 2

241

The Moncpalist Mahing a Ptolit

't8

@ro
.g

L14
12
10

Output

Price
$21

Revenue
2t
40 57 72
85

Total

Marginal
Revenue

Total

Cost

ATC

MC

Total

Profit

I
2
3

2r
19

s30 30

20
19
18

t7
15 13
11

4
5

t7
16

96

481689 s7 14.25 9 13 70 t4 93 15.50 23

4020100

-$

15 15 3

Here are the answers. The output at which the firm would produce most efficiently would be.about 5.1, which is the minimum point of the AIC curve' The perfect competitor would produce at an output of 5.1 in the long run. In the long run the perfect competitor would charge a price of about $13.97 (the minimum, or break-even, point of the ATC curve). I',ll take anything between $13.90
and $13.99.

The Monopolist Losing MoneY

If a monopolist does lose money, what would her graph look like? It might look like the one
in Figure 3. Please find the firm's price, output, and total loss. Write your answers here:

Solution: The price is $18.50 and the output is 200. Total proflt

: : : :

(Price

ATC)

output

($18,s0

$20.40)
200

200

-$1.90 -$380

242

CHAPTER

1O

Figare 3
Monopolist Thking a Loss

4 o

.E

{E

o-

200
Output

300

Is this firm in the short run or the long run? It's in the short run. What will the firm do in the long run? It will go out of business.

Alternatioe Method of Calculating Monopolist's Proft or Loss

Can you flnd the monopolist's profit using the information in Figure 4? shade in the profit box.

It might help to

Using the proflt box, QRST, you can multiply the output (350) by the difference between price and ATC ($25) to get a total profit of $8,750. In effect, then, you're multiplying TS by QT.

In Figure 5 you'll find Figure 4 redrawn showing the profit box QRST

shaded in.

100

100

90 80 70
@

t;

90

ci\ -T'
I

60 50 40 30 20
10

.9 (L

$ l\
II

ffi
@

80
7A

60 50 40 30 ?0
10

u -rt

Ir.iE i^r{-D(llllill tt Ll;71-r-1 Ni.l I i I I

':lltxt,tttttt

(L
I

o o '=

100 200 300 400 500 600 700 800 900 1,000

Output

100 200 300 400 500 600 700 800 900 1,000 Output

Figuro 4
Monopolist Making a Proflt

Figare 5
Monopolist Making a Profir

Monopoly

243

224

180 160

180
't

60

e 140
(D

o 120
rL 100

G g 120 'C L 1oo

140

80 60 40

80

20
10 20 30

40 50

60 Output

70 B0 90 100

Eigare 6

llmopolist Taking a Loss

Vigare

Monapolist Takiag a Loss

Now we're ready to f,nd the monopolist's loss in Figure 6. Again shade in the loss hox and do the math. Using the loss box, JKLM, you can multiply the output (30) by the difference hween price and ATC (-$20) to get a total loss of $600. Figure 7 shows the Ioss box
rftadsd jn.

The Monopolist

in the Sbort Run and in

the Long Run

\: distinction is made for the monopolist between the short and long runs. Why not? There is no disrinction tetween Berause no other firms will enter or leave the industry; by definition, the monopolist is the short run and the long run ' only firm. r the monoPolist'
If the firm is losing money, is it in the short run or the long run? What do .yoa think? It must be in the short run because no flrm will stay in business if it's losing money. ff the monopolist is making a profit, is it in the long run or the short run? Can you tell?
Think about it.
so

If the lirm were in the short run, would this monopolist stay in business? Yesl And it would continue to make a profit. In the long run, then, it would still be making a

profit. Therefore, there is no way to distinguish between the long run and the short run it the firm is making a profit. Let's sum things up. If the firm is making a profit, for analytic purposes, it doesn't matter whether it's in the short run or the long run. If the flrm is losing money, it must be in the short run; in the long run it will go out of business.

Are

All Monopolies Big

Companies?

The answer is no. Many monopolies are tiny flrms operating in very tiny markets. What matters is size relative to the market-the proverbial big fish in the small pond. Chances are there's only one bookstore on your college campus. That store would have a monopoly even though it's not nearly as big as some of the Barnes and Noble superstores. The only video rental store in a small town would have a monopoly. There are tens of thousands of gas stations, convenience stores, restaurants, cleaners, and repair shops that have monopolies in their communities.

244

CHAPTER

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Barriers to Entry
Does the cafeteria at your school have a monopoly? Does it serve either Pepsi or Coke, but not both? Have you noticed that Microsolt sells more computer operating systems than all its rivals put together? How do these companies manage to rna-intain their monop olies? In rlany cases, monopolies are protected by, barriers to entry into their industries. We'll consider each of Iive barriers to entry in turn: (I) control over an essential resource, (2) economies of scale, (3) legal barriers, (4) required scale for inrrovation, and (5) economies of being established. Ba:ic res*urces are hnd. l;ii:or,
ancl cap.ital.

Control over an Essential Resource The Metropolitan Opera has a near monopolr' because it has most of the world's opera stars (labor) under contract. Until the earl1 1960s the National Football League (NFL) had a monopoly, but this was challenged b1the American Football League. The NFL had virtually all the established star footbal! players under contract, so the AFL went after college stars. In 1965 the New York Jets signed University of Alabama star quafterback Joe Namath fbr the then unheard-of sum of $427"000; that action broke the back of the NFL s monopoly. DeBeers Diamond Company in South Africa owns four.fifths of the world's diamond mines, and the International Nickel Company of Canada controls about 90 percent of the world's nickel reserves. The Standard Oil Company controlled the oil industry in the 1880s until the early 1900s because it owned more than 90 percent of the nation's oil
fields and refineries. At that same time the American Tobacco Company controlled 90 percent of U.S. tobacco production.2 Economies of Scale lpically, heavy industry-iron and steel, copper, 4|gpinrrrn and automobiles-has high setup costs. But once your plant and equipment are set upyou can take advantage of economies of scale by increasing your output. Thus we are really talking about two necessary conditions for realizing economies of scale: having the wherewithal to set up and having sufficient demand,for your product. Imagine how dilficult it would be to set up a rival phone network or even a rirz; electric company in a large city. What protects monopolies from potential rivals is thr they're selling enough units to have a relatively Iow AIC. If you were to enter the indu-; try, how could you hope to have the capital to set yourself up to compete effectivelr"l Figure 8 illustrates the problem of economies of scale faced by the small producer of cars. At relatively low levels of production, say 100,000 to 200,000 cars, the firm *il not be able to take advantage of the economies of mass production that are available ro rival firms. According to this illustration, AIC continues to decline appreciabty througi an output of at least 700.000.

I-egal trarriers inciude licensing. li'anchises, and pafntsl.icensing

Legal Barriers These include licensing, franchises, and patei'rts. The whole idea :r
for the government to allow only one firm or a gloup of individuals to do business. Licensing prevents just anybody from driving a taxi, cutting hair, peddling on

rb

Patents

street, practicing medicine, or burying bodies. Often the licensing procedure is desigoed to hold down the numbei of people going inro a cerrain field to keep prices high. Thc state of Arizona requires that hairstylists take 1,600 hours of claSsroom instruction a I cosmetology school approved by the government. The cost? Ten thousanci dollars. trr Oregon hairstylists are even better trained since they are required to receive 2,500 hou* of instruction. Patents are granted to investors so that they have a chance to get rich before sorreone else uses their ideas (see the box, "How Do You Stop others from stealing l-u Idea?"). The patent holders bave 20 years to get their act together. In some cases, perbapr moSt notably U.S. Shoe Machinery Company, a firm buys up patents and uses them o

2In 1911 the Supreme Court broke up rhese monopolies. (See the chapter titled "Corporate Mergers
Antitnrst.")

Monopoly Iirgara
70
S

245

65 @ E 60 C (B a

_-

o s
a>
.C

f,

of scale drive down ATC rhrough an output of at least 700,000 cars.

dcereilsing costs. whc.re econ0nties

Ilylxrilretical Prr:ductir:n Cosrs ii:r C*rr Thi: would be an cxample of

50

45

o O

5
o o
E
0)

(6

1234567
Out:ut ( n hundled rhousands)

ffi*iiTff:ffiTl:Hi:I':'::::T::*lr:{: ;;;;ffi;;"ffiffi;ffiffir: wrrich p.i";;;;;ffi ll,?t?T:.ilX:ff;#ff-J[ i,,l*l"s T"TJ pwelry, which itr:#,1*H',il*",;ff1;.,?li#?T::,j:,-ji::,T: it"_ t;:ffi, ffit"J,ilIi'J"'"'1",,u qua,iry ror identify dri;i first f1u1.3 i d;; ;i;;!"; ,."'0"*#o'f"1;:i::n?:i;tr,r:.J
who had put their drinla o^"_:: hetped people orten rorgor

;
; g
: .i t

rheir their vear, thev signed up 90 stores in Tbxas to their prcduct and racked up sales of

nor

$35.000.

carry

uni u

"opydg#;";;;;"il;

ni,*,i, n"',.

helped. ^

Yji,:E*a>$caiq5el*:*:!.*-'pias*rs6f,

,.4,*,f@,r******r**d

'-:'ol'ation' Japanese firms have been able to dominate the consumer electronics industry successfully obtaining patents on each innovation to the original pr.oau"t. Patents are essential to pharmaceuticar companies, whichln.y ,p*o hu'dreds of --ilions of doilars developing a drug. They would- be a rot r"., ,inirg"ro spend so much -'rney on research if their competitors could irnmediately capitalira o"n ,6. research and ':-l close substitutes. By and large, it appears that patents do .pl"a up technorogical :ii ance and the consequenf flow of new products to the consumer. The most important legal bar-rier is thegovernment franchise. And the most important {i*r,*rnrnenr trar:chises ' rn of local franchise is the public utility-ynu: sr and erectric companies. There,s only - re to a locality. The locar govemment grants the franchise, :i.v's got you. Monopories don't have io worry about givingand, rike'it or not, the compoor ,.*i". ar outrageous ::ices. wrrere else can you go? (See rhe box, 'At Rutgeis cote rs the only choice.,,)

' :';ent cornpetition. A common practice is to obtain a patent on a new product or pfo-:.^ 3nd then. belore the 20 years are up. obtain a new;atent on some improveurenr or

:''

..-.e

R'equired scale for Innovation Do you know anyone who,s invented a board game? -i:r.e they thought of taking it to parker Brotrrers, the company ,rr", ."ii* Monopory? or :rmeone who wants to serl a greeting card idea to Halhnarki or a new toy to Mattel? )'lost inventors don't have the wherewithar to produce and market their ideas, but they '' ould usually be quite happy to hand them or". ,o one of the big guys for
sales or profits.

a slice of

246

CHAPTER

1O

Outbidding Pepsi by about $2.5 million, the Coca-Cola Rutgers, of course, is not the first school to sell an Company paid Rutgers, the State University of New Jer- exclusive franchise to a private vendor. If you happen sey, some $10 million in 1994 forexclusive rights to sell to visit any of Penn Staie's 2l campuses. you might its products to some 48,000 students on three campuses think you're at Pepsi-Cola University. The school has a over the next decade. On-cermpus food and beverage ten-year. $14 million dollar deal lor exclusive rights for vendors may sell only Coca-Cola Company beverages. rftdl company's products. The next time you're in yt,ur which include Nestea iced tea, Sprite, Minute Maid school cafeteria or snack bar, see whether it sells both drinks, and, of course, every varieti of diet and regular Coke and Pepsi. If it doesn't. you'll know who's got the Coke. The football coach will even be doused with Pow- franchise. erade, rather than Gatorade.

While individuals come up with all the great ideas, only large flrms have the mone) and know-how to bring them to the rnarketplace. However, the vast prcllif-eration of dot-coms, many of which have found venture capital to carry them until they are readr to go public (that i,q, sell stock to raise still more capital), certainly proves that you don'r necessarily have to be big to innovate.

Economies of Being Established Companies that have been operating for manl years have recognizable brand names, and their sales representatives have established territories. Most important, the seller and buyer have a long-standing relationship. A retailer can count on her supplier for fast, reliable service. A new company, with newly hired sales reps just learning thet routes, will have a hlri time prying customers from a well-established cornpetitor. How can you convince a tetaile: to buy your product or service when she never saw you befbre and is unfamiliar with whai you're selling? For these reasons, the economies of being established make it difficuit to tak: market share fiom a company that may have been doing business before you were born. But wait-there's more. Established firms selling to retailers, especially superrnarkets, already have their products on the shelves. And just as possession is nine-tenths c: the law, once a firm's products are on a shelf, it's very hard fbr newcorners to dislodg; those products. In the box, "Finding Space on the Shelf'," we see that the economies c: being established include monopolizing shelf space.

Have you ever wondered why a bookstore places certain books in its window? Or right by the cash register? Or why certain publishers have theii books piled-on tables or on entire shelves? Chances are those publishers paid extra bucks for that placemenr. On the shelves of ritail stores. just like in real estate, locarion is everything. Consumer goods manufacturers pay over $100 billion a year for sheif space, of which food companies spend about $60 billion on what is termed givebacks or slotting fees. Most large supermarket chains charge slotting fees, but'significantly, Wal-Mart does not.

Until I started studying economics, I thought that the reason a refrigerated display case was filled with Carvel's ice cream was because Carvel's was nice enough to donate the display case. But Carve}'s is paying for more than just the case. Is paying for shelf space anticompetitive? After several small manuf'acturers complained about being shut out of stores, the Federal Trade Commission has been conducting an ongoing investigation.

Monopoly

247

they were to switch to a different one. They werl

"locked in."
Customers are locked in even

the upper row. The Remington Sewing Machine Corn_ pany decided to make its typewriters with this configu_ ration of keys. [t made so many typewriters that, once all the typists got used to the layout, the less willing

If you know how to type, then you've heard of the QWERTY keyboard, named for the first six letters in

if

rior to altematives. Remington designed

the standard is infe-

slow down typists, who, it was feared, would make too many mistakes if they typed too fast. So whenever you sit down at your computer, you'll know who to blame.

it k"f;;;

the reason that Microsoft set a standard for personal com_ puter operating systems that ,locked in' and consequently gave it a huge advantage in selling its spreadsheet and word processing software." L,ook at Windows Vista. ,.. . . the more copies the company puts on the shelves, the more it sells, because the more people use Windows Vista, the more software gets developed for it. Th;;;; ;ftware is available, the more people buy Windows Vista."*
*James Aley, "The Theory That Made Microsoft," I;ortune, 1996, pp. 65-66.
.n-'..*

In the computer software business, estabiishing a big user base is the key to success, writes James Alet .It{

Apnl 29,
:+1;.

t,|-.'\ * ra;.E + ^},-'!rF|@*..i:*}+r::r'.+

;r

-.-r. "Setting the Standard ").

Another advantage of being established is setting the industry standard, as 6.es '"ilciosoft in computer sotiware and Matsushita in vcR format. why ,1,,", yr.rrrr.vCR =r'e a vHS format rather than a (Sony) Betamax fbrmat,l Mainly b""orr" nearly all - ,ilable tapes are VHS. Back in the late 1970s when Sony and Matsushita went head-read, Sony's one-hour tapes were too short for movies. Since Matsushita produced '' r-hour tapes, their vHS format very quickly became the industry standard (see the

And talking about the advantages of being established, it's hard not to notice that .:-ually everyone drives a car powered by gasoline. Woul<l you believe that the Stanley !.:amer set a world speed record of l2z miles an hour way back in 1909,1 rhat,s ---:ht-a steam-powered car. If the manufacturer had not priced it as a luxury vehicle '.J instead had striven for economies of scale as Henry Ford was doing, we might :r driving stanley Steamers. And perhaps sometime soon! more ancl more of us will all be - -"ing electric cars. which brings us to the rimits of monopoly power.

tr-ir*its tr: &4*ntlg:*ny Fclwc:"

:.:.t. we'll consider limits to the five barriers to entry. we saw how the National Foot_ League lost its monopoly when it lost control over an essential resource-star '-,:tball players. Similarly, Alcoa. which at one time controlled nearly all the world,s

:'il
s

l1]

i.iiriit: 1l ilr,: i:ir: ir;i;-,-iri: iiiirl,

'--.-r$'n bauxite (aluminum ore) reserves, lost its monopoly when othlr.reserves were
:,
c

overed.3

Economies of scale and high capital requirements are a sienificant barrier to entry, but : , 1990 Nissan, Honda, Toyota, Mazda, and Mitsubishi joined the parade of American .-:cmobile producers. of course, each of these producers was set upty its tiiendly giant - lipany back home.

& .g

Finally, even legai barriers have been overcome. Rival phone companies have gone rourr to win the right to plug into local phone companies while providing a coJpet_ : and generally lower-priced long-distance service. In generar, howev.r, government '--rchises are there for a reason: In some industi-ies it makes econornic sense to have .1" one firm in a given locality; so the rianchise may weu be a barrier we don,t want
tvercome.

:--:

Aicoa case is discussed in the chapter .,Corporate Mergers and Antitrust.,,

248

CHAPTER

1O

The ultimate limit to monopoly power may come from the government or from the market itself. If a firm gets too big or too bad, the federal government may decide to trim that firm's sails. We'll examine this issue in the chapter, "Corporate Mergers and Antitrust."

lhc rtrllkct iirnttr ttirrnr'pr,l] power thr.(]Li{h the tieve}rtpr:rett

of substifii{es.

Let's consider how the market limits monopoly power, basically through

the

development of substitutes. Take Kleenex, for example. To this day, some people call tissues "Kleenexes." In the late 1940s Kleenex was the only paper tissue on the market, so ,i.r.raes and KleenexeJ could properly be considered synonymous. BUt over the years scores of competitors have sprung up, and today the market share of Kleenex is very small indeed. Another interesting case is that of Xerox. Having invented the first "dry" photocopy machine, Xerox had the market all to itself during the late 1950s and early 1.960s. Shortly

thereafter,

multitude of other firms began marketing theii own photocopiers. Nonetheless, to this day when someone needs a photocoplt, chances are he or she will ask you to "xerox" it-which is a lot ea$ier than asking you to "multilith-addressograph" it' You certainly weren't expecting to read about male impotence in an economics
textbook, but I'm sure you knoW the name of the drug that treats it. Viagra is a household name. Since it was introduced by Pflzer in 1998, it had the market entirely to itself. But in2004 two new drugs were intoduced-Levitra (made by GlaxoSmithKline and Bayer) and Cialis (EIi Lilly). Although Viagra rivals Coca-Cola as one of the most widely known brands in the world, there goes its monopoly.

IBM, Savin, Canon, Sharp, Pitney-Bowes, Multilith-Addressograph, and

Economies o.f Scale and lr{stural Monopoly

1

wo .iusli ticati i-ltis fi'iL tnotl rpol-v

There are really only two justifications for monopoly: economies of scale and natural monopoly. Economies of scale justify bigness because only a fiIm with a large output can produce near the minimum poin! of its long-run ATC curve. When the fim's output is so large that it.is almost equal to the output of the entire industry, this state of monopoly is justifled by calling it efficient. Of course. we have just seen that the firm is not operating at the minimum point of its ATC curve (see Figure 2), but that's another story.

What fs Natural Monopoly?

I1'T::*1T$"'ff ::l?',-;:11':1[J:,""':H;:i]?:;;[:sl*:ffff

iffi'#

entire crop of Florida oranges. Close, but no cigar. Cigar? No, even Cuban cigars are not a natural monopoly. irl, natural rlr:nopolies Examples of natural monopolies are the local gas and electric companies, the local Exarnples phone companies, and local cable TV companies. Why are these natural monopolies? Because they can provide cheaper service as monopolies than could several competing firms. Let's see why. In Figure 94, one electric company serves an entire suburban town. Pictured here

llffi J.ffi:';1.$"i.#;;':*Ti"T-"JJiH',-:H:'::*;H:iTLlrT*:fi IISH

they have?

Figure 98 showS four competing electric companies on an identical street of a identical town somewhere else in suburbia. Notice the four power lines running aloog the street. In this town there's freedom of choice; you can hook up with any of thes four companies. There's only one problem with this arrangement. It's much more expensive. You seeeach company, assuming customers are evenly distributed, does only one-quarter of tb business that would be done by a company that had a monopoly. While it must constnd

Monopoly Figere I

249

One Electric Ctmpany Is Better

tha* Fcur
Panel A shows a single electric transmission feeder cable serving all the homes on one block. Palel B shows four cables serving that same block. It is a lot more efficient (and cheaper) to have one cable than four.

dles?

{oEstruct four parallel power lines when one will do as nicely? And, one might add g:enthetically, why dig up the street four times rather than once to lay and repair the

same system of power lines, it realizes only one-quarter of the output. Its costs are higher than those of the monopoly.a --h From society's viewpoint. these higher costs reflect a great waste of resources. Why

can be a natural monopoly? Surely the multiplex realizes great economies of scale operating one large stand, which is busy all the time, rather than 20 separate stands h 20 scattered movie theaters. But unlike WaI-Mart and other big box stores, these folks doo't often pass on their savings to their moviegoer customers in the form of lower

lkater

qimge phone, my lawyer on the gray phone, and my accountant on the yellow phone.,' Ard what if the president needs to reach his opposite number in the Kremlin in a hurry d can't remember: "was it the red phone for the Kremlin and the green phone for llcDonald"s-or was it the other way around?" you can imagine the puzziement in Ilmcow at getting an order for two Big Macs and a large order of fries. Speaking of fries, would you believe that the snack stand at a multiplex movie

This is the case for natural monopoly. It's cheaper, it's more efficient, and it,s more ot-enient. The bottom line is that our bills are much lower. Another case for natural monopoly can be made with respect to local telephone rYice- Imagine if we had four, six, or eight competing phone companies. Placing a call ndd be like playing Russiaa roulette. fmagine your surprise if you actuaily got fturgh! It would not be easy to conduct business. "Let's see now, I call this client on the

Imagin* if we had six or eight corrf:er;ng l*cal phr:r:e

conrpairie!.

br

prices.

ing local rivals into their markets by making their lines available? Under the Telecom -{ct, regulators in many states are finally forcing the BElls to lower wholesale rates for Iml service. competitors such as sprint, Talk America, Trinsic, and Supra Telecom cootrol about 15 percent of the local market.
y,rhese are average fixed,costs-_They]e four tinies as high as that of the electric company that has if it cost $4 million to lay cable through a town, and if 40,000 familiei lived in the mrn, the monopolv would have an AFC of $i00 ($4,000,000/40,000). Each of the four competing companies rculd have an AFC of 9400 per famity ($4.000,000/10,000).
e mono_poly. For example,

The 1996 Telecommunications Act allowed the local phone companies into the longdistance market but only after they could prove that their local markets were open to competition. so are the Bells (among them {erizon, BellSouth, ewest, and SBC) allow-

tTechnica[-

250
Fagtare 1S

CHAPTER
qf the

1O

?trre h4arket Situari<*n

R<xhesger El*crrie C*rnpa*y If free to set its own price, the company would charge $1 1.10. Bur the New York State Public Service Commission could set the priee iower, say at $10.75. @

18

16 14

a_ 10

o .!l

lz

Ta:o Policy Alternatittes

Tw(, w:!)s to prevent public u{ilities fr*m +}:arging {}utrag**us Frics *re:

ili i:]

g*-1grnm*nt rsgulatio* a$d

g0vcmrneni ownership.

We have accepted certain instances of monopoly-mainly, local public ut.ility companies. These. companies are natural monopolies and provide the pubtic with betier unj *oo cheaply.priced service &an it would get from most competiog fir*s. How can we prevent these public utilities from taking advantage of their powir and charging outrageous prices? There are two ways: (r) government regulation and (2) gou.-ri"ni o*n".ihip.

Government Regulation Suppose Figure 10 represents the market situation of the Rochester Electric Company, which is now regulaied by the New york State public
Service Commission.

The commission would have two objectives: a lower price for electricity consumers . and a higher output of electricity than.we see in Figure 9. To accomplish both ends,.the commission would set the price of electricity at about $10.7.5, whici is lower than the current market price of $11.10. How much would output now be? How abou[ total profit? Using the formula for rotal profit, we get: Total profit

l j
1

(price
$1.45
$7.61

: :
:

ATC)

Ourpur

($lo.7s

$9.30)

x i.zs

5.2s

This is_illustrated in Figure 10. Consumers now pay a lower price and receive more electricity than they would have under an uruegulated monopoly. But rhis is not p".t* a solution because even the regulated natural rnonbpoly does. not necessarily proj"""-* the minimum point of its ATC cur./e.

,4re goreri: me $1 : *\'t *44 enl*rprises inef Sci*r:a?

Government ov,,nership The second option for a natural monopoly is government ownership. The post office, the Tennessee Valley Authority, Amtrak, it" N"*'v..t si"" Power Authority, the New Jersey Transit System. and the ivt.t opotiia, rrrr.i, ar,fr"rity of Boston are all examples. Are these inefflciert government boondoggles whose jobs could be better done by private enterprise? Consider the origins of the New Jersey public transportation system. When the private bus lines were unable to operate *ith massive public subsidies, the state of New Jersey reluctantly took them over. "r",

Monopoly
The case of the Tennessee Valley Authority (TVA) is even stranger. TVA uses itself as a yardstick with which to measure the costs of power provided by privately owned milities. The latter complain about "unfair" government competition, and they do have a point because TVA sometimes provides electricity at half the cost of that incurred by Frivately owned companies.

257

This is rather interesting when one considers the origins of TVA. Much of rural

well as parts of other states near the Tennessee \-alley, were not provided wiih electricity by private power companies as late as the early 1930s because they were not deemed worthy customers. They were too poor, they lived too far apart, and it was simply not economically feasible to run transmission cables into rhis pafl of the country. So TVA. without competing with private companies. went into &is area and provided it with electricity at half the going rate. The general thrust of public policy in the area of natural monopoly is to let private enterprise do thejob but to regulate prices closely. Only as a last resort, when private enterprise is unwilling or unable to do the job. does the government take on the job itself.
Tennessee, Arkansas, and Alabama, as

l-rrt p!"ivrlle e*feqli:ise .ir] lhe

lob-if it

ean.

Is Bigm*ss #**d *r ffi*d?

It-s both. If you're a big company. do you necessarily behave badly? Why do big companies-Microsoft, Wal-Mart, General Motors, the oil, tobacco, and pharmaceutical companies, and the giant defense contractors-seem to have such bad reputations? And can a case be_ made that bigness is good?
VWlten

Is Bigness Bad?

From what we've seen so far, monopoly isn't all bad. At times only a monopolist can fully take advantage of economies of scale; and in certain instances, particularly with respect to local public utilities, there are natural monopolies. In the case of Xerox, IQeenex, and IBM, these innovative companies once had monopolies simply because each was the f,rst'to enter its field. Why, then, db so many people dislike monopolies? For one thing, monopolies tenrl m be inetficient. As il.lustrated earlier in Figures 1 and 2, a monopoly does not produce at the minimum point of its ATC curve. Furthermore, by always restricting output to some point to the left of that minimum, the monopoly is preventing resources from being allocated in the most efflcient manoer. Land, labor-, and capital that would have otherwise flowed into the monopolized industry are kept out and will eventually find their way into other industries where they will not be as efficiently used. Bigness can also mean inefficiency. In the chapter before last, we talked about corgruate bureaucracies and diseconomies of scale. This problem has become acute among Se giant firms that are often referred to as "corporate dinosaurs." The box titled, "The Corporate Hierarchy" takes a critical look at this growing problem.

iligr:ess clrr aisu :r:ea;:

i::elh+i*l:c;i-.

When Is Bigness Good?

To be big is not necessarily to behave badly. Natura[ monopolies. flor example, taking .rdvantage of economies of scale, deliver services much more cheaply than could a multitude ol competing firms. And in general, large firms can take advantage of economies of scale. Sometimes a flrm, such as Xerox, IBM, or Microsofl, is the first to enter an indusr-v. Should we ask such a firm to wait until each of its competitors can catch up? Or clo ue allow them to grow very large? Perhaps the question we should ask is whether a firm is big because it is very bad or because it is very good. Wal-Mart, while technically not a monopoly, is certainly the dominant retailer in the f nited States. Question: Is it good or bad? Read the Current Issue on page 574 and then
decide for yourself.

t'

CHAPTER

1O

Americans are fond of creating peeking orders, and the bureaucratic managerial structures set up to run America's large corporations are prime examples. In Japan and Germany where the corporate hierarchy is substantiall-v flatter. chief executive officers earn 10 tirnes what their average employees earn. But in the United States the average CEO pulls doq'n more than 400 times the earnings of ttre average worker. In the chart you'11 find that since 1980 the disparity between
the saiaries of CEOs and ordinarv workers has increased

corporations have. The tip ofthe hierarchy passes orders

down to the troops. The rank-and-file worter is rarely consuited and does not identify with the companv or with the product it produces. Fuflhermore. the petple who are rnaking the decisions at the top have virtualty no contact wirh their customers. The end result is olten a high-cost, low-guality product.
The large college texttrook publishers-McGraw-Hill

almost tenfold.

(which publishes my book), lntcrnarional Thompson, lloughton-Mifflin" Pearson. .lohn Wiiey and Sons. and W. W. Norlon-are major exceptions to the hierarchical

CEO Compensation as a Multiple of Average Employee Compensation, 1960_2004 600x 500x 400x 300x
2AOx

00x
0x
1

960

965

1974

1975

980

1985 1990

1995

Soarres.' C- William Domhoff. "\{ealth, Iflcome, md power,,, Septembgr 2005,

Our leading corporations have become so complex, so overmarraged, so distant from their customers, and so alienating to their rank-and-file empioyees that it is a wonder they have been able to function as well as they have. Perhaps the dilemma is best summed up by manageErent ccnsultant lchak Adizes: "Good organizations should be structured by geniuses so that idiots can run them. Unforlunately, most American organizations are structured by idiots so that it takes a genius; to run
thern."+

nr1e. Their sales representatives provide daily feedback from their- customers, who happen to be your professors. Their editors, regional managers, marketing managers, as well as national sales managers have had years of selling

experience themselves, and often accompany the sales feps on visits to coileges. Although these companies cer-

tainly do exhibit the trappings of corporate status and privilege, the decision makers are a lot closer to the customer than the rest of Corporate America.

'lhis structure is not efficient. It allows no feedback from consumers, no competition, and very f'ew work incentives. Bur it's .iust the structure our own huge

*Quored

in

(New York: Congdon & Weed, 1989), p. 108.

Steven Schlosstein. The End oJ the Ameriiljn Century

Monopgly

253

rithout the spur of foreign competition. the quarity rould not have improved nearly as much.

"..pJti"n. is no contror costs or to use, resources irn"ientty. Indeed, there need to spgnd much E'ney on research and development. to improve manufacturing processes, to develop new products, or to be responsive to customer needs. A monoporist can charge her cusr.omers higher prices and provide poorer service 'nan she wourd if she had compdtitors. I mean, where erse you go? Have you ever lost your temper dealing with your rocal bank "uo lassuming ir,, irr.'"rrri one in town), the phone company, or the gas or electric company? you've}eard rh" p#rr. ..The customer is always right"? Not when you're dealing wiih a monopoly. one of the most important effects of the growing unounr of foreign competition, especially from the Japanese, is the new emphasis on product quality. American cars, specialty steel. machine rools, and a whore host of p.J;;;; have arl enjoyed tremendous quality improvement over. the last 15 "orrlu*", years. It is a virtual certainty that

Tlte Economic Case against Bigness I'tl start with the obvious. Does the monoporist operate at the minimum point of her ATC curve? No! Just glance back at Figurei f anOJ. --Because rhe monoporist is not p."*id uy there is no great incentive fo

The best of all monopoly profits is a quiet life.

-John

Hicks

,r*a*J. oi A*"ri"u, producrs

Is monopoly good, bad' or indifferent? One fair conclusion is that natural monopoly sould be good. if only its power were not abused. ert *onofoii". Uur.a on other frctors-I refrain from calling them "unnatural monopolies,,-16r56 b" look"d ;; ;;; sspicion. They may be up to uo good, and they alsornay be illegal. In a sense, virtually all firms are monopoli"i. rrr" lastlas statiin before the turnpike catrance, the only bar on your block, and the onry grocery in your neighborhood that

tere

tta]'s open until midnight are all monopolies. The test they-musi pass is whether or not are close substitutes.

Er every day in the real world.

who decides this? The buyers do. If the buyers in your rocal area think thar your store is &e only game in town*that no one else even comes close-the, yo, rruul-l';rrdr;. &rt let's not get carried away. No one is going to drive 50 miles just to buy your gas, drink yy'-beer, or buv a quart of milk at vo*1ro.:". wt at you,r" ;;J; ;i."i locar monopory. Yor may even be earning an economic profit, but you,r" ootlractly Ex"xon. From this discussion.we shal make a very neat segue into *orroporirii" competition, rtich is the subject of the next chaprer. ny Lierraing some el"ments of :me elements of perfect competition, we will obtain a mixture of flrms monopoly and that we encoun-

Lasr

tr'e'*ref
early years

of the new nr-llennium, Apple's ipod ernerged as the crear.leua"iin the-sale napi players, gamer_ iB about three-quarrers of rhe market-a near monopoly.s B;ril;; in mid_2007, "r the oompany came out with its iphone, a combined cell phone, Mp3 player, and web
so while the iPod had a near monopoly in the media prayer market, Jobs,s aspiration the iPhone was mrrch more modesi. Bur as the iphone h.rp, ;h;'ce, phone, web -cr" koryser, and media prayer markets converge. we need to ask this qr"r,l;, q,,pany expect to attain monopoly status in this "", market? Because this market is so
browser. sre'e Jobs, the company's cEo, said then that he hoped the iprrorr" wourd capture I percent of th1 cell phone marker within a couple of years.

As technological change accelerates in the communications field, we are increasingly askirg ourselves, "Just what constitutes a monopory?,' In the

fu

hll

disclosure:

own some Apple stock.

254

CHAPTER

1O

fragmented and its technology changing so rapidly, it seems unlikely that any company will become the dominant player, let alone a monopoly.

*a.ar:r*xat ssuc: trVqlar3d Yq>ffi &?3*w 1ffbtr*Marf #i:ar: a $u6:*rcrnrcr- im }'*ur t*rnmunityP
Let's start with two facts almost eveiryone agrees on:

r*'

1. wal-Mart lives up to the slogan printed right on every shopping bag, 'Always low prices. Always." After all, 20 million daily shoppers can't all be wrong.

i.

wal-Mart's full-time employees' average hourly wages are about $10 an perhaps 30 percent lower than those paid by competitors.

hour-

These two facts create a personal conflict for many of us. After all, who can resist all those bargains? But those bargains are subsidized by low wages. Here's another conflict to mull over. Wal-Mart imports $20 billion a year of microwave ovens, TVs, DVD players, toys, shoes, apparel and orher goods from China. It then passes along the savings in the form of low prices. But these imports not only add to our trade deficit, they put some Americans out of work. Is Wal-Mart anti-union? Not even one of its more than 4,000 stores is unionized. (See the chapter on labor unions in Econon'tics and Microeconomics.) And a unionized

Wal-Mart would pay higher wages and provide better medical beneflts. As wal-Mart grew, so too did its bargaining power over its suppliers. By passing on these bargains to its customers, it could sell huge quantities of merchandise at amazingly low prices. This brought in more customers, which enabled Wal-Mart to grow even larger and get even better deals from its suppliers. Wal-Mart relentlessly drives down its costs-not just by paying relatively low wages and squeezing its suppliers-but by running a ruthlessly efficient, lean and mean operation. Its customers have an average family income of $35,000, and save about g1,000 a year by shopping there, while more affluent families save even more. And while its wages are admittedly low, virtually each new store is flooded by job applicants. one may conclude, then, that wal-Mart's low everyday wages are dictated more by supply and demand than by a desire to exploit its hired help. Does Wal-Mart discriminate against its fernale employees? (See the chapter on labor markets and wage rates in Economics and, Microeconomics.) A huge class-action suit ha-r been filed on behalf of 1.6 million past and current employees. The suit notes that women make up over 72 percent of all hourly ernployees, but just one-third of the store managers are women. The jury may be out on this case for some time to come. In recent years Wal-Mart has been successfully sued by groups of its employees or.'er pay and working conditions:

hourly workers in damages for failing to provide meal breaks. " In 2006 a Pennsylvania jury ordered Wal-Mart to pay g78 million to 187,000 currenr and former employees for not paying them when they worked through rest breali-q
and worked off the clock.

" In 2005 a california court ordered rhe company to pay $172 million to 116,0ffi

" wal-Mart

reached an agreement with the u.S. Department of Labor to pay $35.5 million in back wages plus interest to settle a federal lawsuit that accused the company of violating overtime laws involving 86,680 workers.

decrease

the price cuts other retailers must make to compete, Wal-Mart has saved consumers weII over $100 billion a year. Far more than any other business firm, it has been responsibLe

According to one recent academic study, when wal-Mart enters a rnarket, prices by 8 percent in rural areas and 5 percent in urban areas. When you factor ir

for holding down our rate of inflation.

Monopoly

255

In 2005, the company annorincqd a new health plan with premiums as low as $11 a , but still leaving many employees paying thousands of dollars in out-of:pocket expenses. By 20O8 just over half of Wal-Mart's workers lad company health insurand 46 percent of their children were uninsured or on Medicaid. Has Wal-Mart driven smaller retailers out of business? Clearly it has. Often, soon a Wal-Mart supercenter opened, local supermarkets as well as smaller groceries lorced to close. lndeed, big box retailers as well as giant suburban shopping malls responsible for the demise of downtown shopping areas, flot just in cities, but in
torrns as well.
Perhaps Whl-Mart attained its Iinest hour simply by remaining open

for

brrsiness in

wake of Hurricane Katrina; By keeping their stores stocked with fgod and water, it ,ided a lifeline to hurricane victims. Significantly. while some other sellers were price

ing, Wal-Mart lived by its motto; "Always low prices. Always." This is more fully

in Chapter

More and more communities have opposed the opening of new Wal-Marts. Other ities welcomed Wal-Martr not just because of its low prices, but for the new jobs govided. Would yaa allow Wal-Mart to open a supercerter in your community?

learn more about the good and the bad aboutWal-Mart,.you-can go to these sites:
wwra,-walmartfacts.com; and www.:aalmartwatch.com.

on the weh

estions for Further lFhaught and Diqcr"rssi*n

Ar:very large furns economically justifiable? What are the pros and cons of bigness? ?- A monopolist can control her price or the quantity she sells. but she can't control ' both. Explain this statement.
3- Make the case for natural monopolies.

l.

1. Are all monopolies large firms? Make up an example of a monopoly that is a r*1it t.*. 5. How.does the derr.rand curve faced by the monopolist differ frorn that confronting the : perfect competitor? Why do they differ? : 6- Wtlat are tbe main barriers to entry? Explain how each barrier can foster monopoly. 7- Pharmaceutical companies can tuin out pills for pennies and sell them for dollars. Many people who need the5e drugs can't afford them" How can these companies -

justify charging so much?

8- Practical Application: Wal-Mart wants to open a superstore near you. List the reasons why you think they (a) should be allowed to do so; (b) should not be allowed to do so.