03. Maximizing Profit Under Monopoly

Question 1

Definition market power

Answer 1

can rise P over MC without having to fear that other firms enter the market

Question 1

Definition Patent

Answer 1

can exclude competitors

Question 2

What are sources of market power?

1.
2.
3.
4.
5.
6.

Answer 2

• selling unique goods with barriers to entry such as
  1. patents
  2. government regulations other than patents (eg exclusive licencses)
  3. economies of scale
  4. exclusive acess to an important input (eg controlling diamond mines)
  5. technological innovation

Question 3

a monopilist is not a small share of the market. since it sells a unique good it faces….
as a result…

Answer 3

1. the entire downward sloping market demand curve
2. MR < P

Question 4

whats the slope of demand and slope of marginal revenue curve of monopolist?

Answer 4

1. demand: P=BQ
2. MR= A-2BQ

Question 5

what is the profit max of an monopol?

Answer 5

MR = MC

Question 6

What is the profit per unit?

Answer 6

price- Average cost

Question 7

What are the main differences between monopolys and competitive markets?

1.
2.
3.

Answer 7

• single versus multiple sellers
• price taking versus price making
• market versus individual demand

Question 8

Some of the sources of monopoly power are decidedly not inevitable:

1.
2.
3.

Answer 8

• government action
• strategic decisions by the firm
• possibly illegal actions

Question 8

What are the main similarities between monopolies and competitive markets?

1.
2.
3.

Answer 8

• profit maximizing behavior
• marginal analysis and the MR = rule for profit maximization
• calculating profits

Question 8

Some of the cases of monopoly are simply a consequence of underlying economic conditions such as

1.
2.

Answer 8

• scale economies
• network exernalities

Question 9

what are the three factors limiting monopoly power?

1.
2.
3.

Answer 9

1. the nature of market demand (if consumers can switch to other product and easily decide not to buy at all; see elasiticty of demand)
2. firm number (if there are many, its unlikely that any one firm can affect price significantly)
3. interaction among firms (if rivalry is aggressive and everyone wants to capture as much of the market as possible, no one can raise prices profitably)

Question 10

What might be natural barriers to entry?

Answer 10

• patents, copyrights ec
• economies of scale make it too costly for more than a few firms to supply the entire market. it may be so large that its only efficient for a single firm

Question 11

When several firms compete with one another, the elasticity of market demand…

Answer 11

… sets a lower limit on
the magnitude of the elasticity of demand for each firm.

Question 12

A successful advertising campaign shifts the monopolist market demand curve… (1) and (2)

This allows the monopolist to sell (3)

Answer 12

1. outward and makes it less elastic
2. more units at a higher price

Question 13

The more users connected to the respective network, the more…

Answer 13

1. potential communication parners it has for users and the greater the value of the network

Question 14

What is the derivative benefit?

Answer 14

• its the benefit that an individual derives from the size of the network, superimposes the generic product benefit as a decisive purchasing criterion

Question 15

Bandwagon network effects Definition

Answer 15

a person places greater value on a good as more and more other people possess it

Question 16

2-sided platform network effect | Definition

Answer 16

two sets of agents (user groups) interact though an intermediary or platform, and (the decision of) each set of agents affect the outcomes of the other set of agents

Question 17

Data network effect | Definition

Answer 17

additional usage of a product yields data, which in return increases the value of the product

Question 18

Personal utility network effect | Definition

Answer 18

users personal identities are tied to the network in question, often with usernames tied to their real name

Question 19

Multi (2) sided platforms usually exhibit……

These effect can require platforms to…

Answer 19

1. high cross side network effects
2. reach a critical mass of users within short time

(chicken egg problem)

Question 20

Network effects on their own are not sufficient to sustain market power. In addition,
(1) must exist to keep customers.

Answer 20

switching costs

Question 21

What might be reasons why there is a trend towards monopolies?

1.
2.
3.
4.
5.

Answer 21

• high profits, high salaries attracting the best graduates
• product range is consistently expanded (apple)
• attempt to penetrate existing markets (amazon, drugs, food, movie)
• smaller competitors regulalry bought
• VC market dominated by big 5