![]() In addition to standards, a source of network externality is third-party products. Fax machines are valuable only if others have similar machines. They are available everywhere, unlike proprietary batteries. Since AA batteries are standardized, it makes them more readily accessible, helps drive down their price through competition and economies of scale, and thus makes the AA battery more valuable. Standards are a common source of network externality. A network externality arises when others’ use of a product makes it more valuable to each consumer. ![]() The demand-side equivalent of an economy of scale is a network externality Situation that arises when others’ use of a product makes it more valuable to each consumer. Similarly, scale economies in electricity generation meant that most communities had a single electricity provider prior to the 1980s, when new technology made relatively smaller scale generation more efficient. For example, long-distance telephone lines were expensive to install, and the first company to do so, AT&T, wound up being the only provider of long-distance service in the United States. A monopoly can result when the average cost of a single firm serving the entire market is lower than that of two or more firms serving the market. The scale economy needs to be large relative to the size of demand. Many of the Beatles’ songs that Paul McCartney coauthored were purchased by Michael Jackson.Ī second source of monopoly is a large economy of scale. Fair-use provisions protect individuals with noncommercial uses of copyrighted materials. Time Warner owns the rights to the song “Happy Birthday to You” and receives royalties every time that it is played on the radio or other commercial venue. Copyrights create monopoly power over music as well as cartoon characters. Thus, the Disney Corporation owns copyrights on Mickey Mouse-copyrights that, by law, should have expired but were granted an extension by Congress each time they were due to expire. (Patents generally last 20 years, but pharmaceutical drugs have their own patent laws.) Copyright also confers a limited monopoly for a limited period of time. New drugs are granted patents that provide the firms monopoly power for a period of time. Many cities and towns license a single cable TV company or taxi company, although usually basic rates and fares are set by the terms of the license agreement. Intelsat was a government franchise that was granted a monopoly on satellite communications, a monopoly that ultimately proved quite lucrative. The most common source is to be granted a monopoly by the government, either through patents-in which case the monopoly is temporary-or through a government franchise. There are three basic sources of monopoly. Porsche has a small share of the automobile market-or even the high-end automobile market-but still has monopoly power in that market. Air dominated air traffic to Philadelphia and Pittsburgh but still lost money. This behavior of rivals is the subject of the next chapter.Ī large market share is not proof of a monopoly, nor is a small market share proof that a firm lacks monopoly power. The theory of monopoly is applicable to such firms, although they may face an additional and important constraint: A price increase may affect the behavior of rivals. ![]() Some distinguish the terms by whether they are “large” or not others by how long the price increase can be sustained. Both terms require downward sloping demand and usually some notion of sustainability of sales. These terms are used somewhat differently among authors. or monopoly power, which means that they can increase their price above marginal cost and sustain sales for a long period of time. However, many firms have market power The ability to increase their price above marginal cost and sustain sales for a long period of time. ![]() Microsoft has a great deal of market power, but a small percentage of personal computer users choose Apple or Linux operating systems. post office has a monopoly in first-class mail but faces competition from FedEx and other express-mail companies, as well as from fax and e-mail providers. is a firm that faces a downward sloping demand and has a choice about what price to charge-without fearing of chasing all of its customers away to rivals. A monopoly A firm that faces a downward sloping demand and has a choice about what price to charge. ![]()
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