[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 12
MONOPOLY,
MONOPOLISTIC
COMPETITION, AND
OLIGOPOLY
∂
As we discussed in Chapter 11, many markets in our economy are not well
described by the perfectly competitive model. For years, AT&T was the
only long-distance telephone carrier. Kodak controlled the market for film,
and Alcoa the market for aluminum. Some firms so dominated a product that their
brand name became synonymous with the product—for example, Kleenex, or
Jell-O. These firms did not simply take the market price as given: they recognized
that their actions could affect the market price. And the power to affect prices will
influence a firm’s decision about how much to produce.
In some industries, a handful of firms dominate the market, producing similar
but not identical products: think of soft drinks (Coca-Cola, Pepsi, Canada Dry) or
running shoes (Nike, Adidas, Reebok). Other industries may include a large number
of firms, each producing a similar but slightly different product. When one firm raises
its price a little—say, by 2 or 3 percent—it loses some customers, but it does not lose
all customers, as would happen under perfect competition. If such a firm lowers its
price by 2 or 3 percent, it gains additional customers but not the entire market.
Picking up where the discussion in Chapter 11 left off, this chapter explores
markets in which there is either limited competition or no competition at all. It
explains why output in these markets is typically lower than it would be under more
competitive conditions, and it identifies the various factors that limit competition.
Monopoly Output
Economists’ concerns about monopolies and other forms of restricted competition
stem mainly from their observation that the output, or supply, of firms within these
market structures is less than that of firms that face perfect competition, and prices
261