Page 465 - Microeconomics, Fourth Edition

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Why Do Firms Play Monopoly?

“Book your place in space now and join around 250 Virgin Galactic astronauts who will venture into space.
1
Tickets cost $200,000 and deposits start at $20,000.” With these words on its website, Virgin Galactic
describes its plan to make suborbital space travel available to almost anyone who wants to travel into
space. Passengers will first undergo three days of preflight preparation and training at the Virgin Galactic
New Mexico Spaceport. Passengers then will fly on Virgin Galactic’s SpaceShipTwo, a 60-foot-long vehicle
designed to carry six passengers and two crew members on a two-hour journey that will reach an altitude
of 110 kilometers, 10 kilometers beyond the boundary that marks the beginning of space.
If all tests go well with Sir Richard Branson’s new flight system, Virgin Galactic will be operating the
first manned commercial spaceship in the near future. As the only provider of this service, Virgin Galactic
will have a monopoly in its market. A monopoly market consists of a single seller facing many buyers.
Initially, when Virgin Galactic is the only supplier of commercial space travel, it will be a pure monopoly,
serving 100 percent of the market because it faces no rivals. Its production decisions are made in a setting
vastly different from the environment in a perfectly competitive market, where each firm is a “price taker”
because its actions have an imperceptible impact on the market price. In contrast, Virgin Galactic knows
that the number of customers willing to book flights will surely depend on the price it charges, and it can
therefore set the price of a flight. Virgin Galactic will thus be a “price maker” in the market.
While pure monopolies are not widespread,
many markets operate under near-monopoly condi-
tions, in which a single firm accounts for an over-
whelming share of sales. For example, the German
firm Hauni Maschinenbau has a global market share
of over 90 percent for cigarette-making machines.
Another German company, Konig and Bauer,
produces 95 percent of the worldwide supply of
money-printing presses. Within the United States,
Microsoft Windows accounts for over 90 percent
of the market for operating systems for personal
computers. Even Virgin Galactic, which may serve the
entire market when it launches its space transport
service, may become a near-monopoly within a few
years when other firms enter the market.
Whether a firm produces as a near-monopoly or
a pure monopoly, it must recognize that its output
decision critically affects the market price for its
product. For example, if the firm reduces its rate of

1 http://www.virgingalactic.com/booking/, accessed February 16,
2010.

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