Monopoly

Monopoly

SECTION10

  • Module 28: Monopoly in Practice
  • Module 29: Monopoly and Public Policy
  • Module 30: Price Discrimination

EVERYBODY MUST GET STONES

A few years back De Beers, the world’s main supplier of diamonds, ran an ad urging men to buy their wives diamond jewelry. “She married you for richer, for poorer,” read the ad. “Let her know how it’s going.”

Crass? Yes. Effective? No question. For generations diamonds have been a symbol of luxury, valued not only for their appearance but also for their rarity.

But geologists will tell you that diamonds aren’t all that rare. In fact, according to the Dow Jones-Irwin Guide to Fine Gems and Jewelry, diamonds are “more common than any other gem-quality colored stone. They only seem rarer…”

Why do diamonds seem rarer than other gems? Part of the answer is a brilliant marketing campaign. But mainly diamonds seem rare because De Beers makes them rare: the company controls most of the world’s diamond mines and limits the quantity of diamonds supplied to the market.

In the previous section we concentrated on perfectly competitive markets—those in which the producers are perfect competitors. But De Beers isn’t like the producers we’ve studied so far: it is a monopolist, the sole (or almost sole) producer of a good.

Monopolists behave differently from producers in perfectly competitive industries: whereas perfect competitors take the price at which they can sell their output as given, monopolists know that their actions affect market prices and take that effect into account when deciding how much to produce.

In this section we examine how monopolies function and differ from industries in perfect competition. We’ll also look at the policies governments adopt in response to monopoly behavior. We conclude with a discussion of how monopolists use price discrimination—charging different types of consumers different prices for the same good—to increase profits.