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

The size of the market depends largely on transportation costs. If, somehow, the
cost of transporting cement were lowered to close to zero, then there would be a
national cement market. Many firms then would be competing against each other—
the size of the national market is far larger than the output at which average costs
are minimized.
The size of output at which costs are minimized depends in part on the magnitude
of fixed costs. Since research is a fixed cost, its growing importance in many
industries has increased the size of output at which average costs are minimized.
At the same time, new technologies and business arrangements are enabling many
firms to reduce their fixed costs. Today, firms need not have a personnel department
for routine matters like paying checks; they can contract for such services
as needed.
Because both technology and transportation costs can change over time, the
status of an industry as a natural monopoly also can change. Telephone service used
to be a natural monopoly. Telephone messages were transmitted over wires, and
installing and using duplicate lines would have been inefficient. As the demand for
telephone services increased, and as alternative technologies such as satellites and
cell phones developed, telephone services ceased to be a natural monopoly. Today,
consumers in most communities can choose from among several firms that provide
telephone service.
Assessing the Degree of
Competition
In the real world, few industries match the extreme cases of monopoly and perfect
competition. Usually industries have some degree of competition. How then should
that degree of competition in an industry be assessed?
One way to do this is to ask, What will happen if a firm in that industry raises
its price? How much will sales of its product fall? In other words, what is the
elasticity of demand for the firm’s output? The lower the elasticity of demand—the
less the quantity demanded falls when price is increased—the greater the firm’s
market power.
Two factors affect the elasticity of the firm’s demand curve and, therefore, its
market power. The first is the number of firms in the industry—more generally, how
concentrated production is within a few firms. The second is how different the goods
produced by the various firms in the industry are.
NUMBER OF FIRMS IN THE INDUSTRY
Competition is likely to be greater when there are many firms in an industry (textiles,
shoes) than when a few companies dominate (home refrigerators and freezers,
greeting cards, soft drinks). Table 12.2 gives the percentage of output that is
270 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY