03. Maximizing Profit Under Monopoly Flashcards
Definition market power
can rise P over MC without having to fear that other firms enter the market
Definition Patent
can exclude competitors
What are sources of market power?
1.
2.
3.
4.
5.
6.
- 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
a monopilist is not a small share of the market. since it sells a unique good it faces….
as a result…
- the entire downward sloping market demand curve
- MR < P
whats the slope of demand and slope of marginal revenue curve of monopolist?
- demand: P=BQ
- MR= A-2BQ
what is the profit max of an monopol?
MR = MC
What is the profit per unit?
price- Average cost
What are the main differences between monopolys and competitive markets?
1.
2.
3.
- single versus multiple sellers
- price taking versus price making
- market versus individual demand
Some of the sources of monopoly power are decidedly not inevitable:
1.
2.
3.
- government action
- strategic decisions by the firm
- possibly illegal actions
What are the main similarities between monopolies and competitive markets?
1.
2.
3.
- profit maximizing behavior
- marginal analysis and the MR = rule for profit maximization
- calculating profits
Some of the cases of monopoly are simply a consequence of underlying economic conditions such as
1.
2.
- scale economies
- network exernalities
what are the three factors limiting monopoly power?
1.
2.
3.
- the nature of market demand (if consumers can switch to other product and easily decide not to buy at all; see elasiticty of demand)
- firm number (if there are many, its unlikely that any one firm can affect price significantly)
- 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)
What might be natural barriers to entry?
- 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
When several firms compete with one another, the elasticity of market demand…
… sets a lower limit on
the magnitude of the elasticity of demand for each firm.
A successful advertising campaign shifts the monopolist market demand curve… (1) and (2)
This allows the monopolist to sell (3)
- outward and makes it less elastic
- more units at a higher price
The more users connected to the respective network, the more…
- potential communication parners it has for users and the greater the value of the network
What is the derivative benefit?
- its the benefit that an individual derives from the size of the network, superimposes the generic product benefit as a decisive purchasing criterion
Bandwagon network effects Definition
a person places greater value on a good as more and more other people possess it
2-sided platform network effect | Definition
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
Data network effect | Definition
additional usage of a product yields data, which in return increases the value of the product
Personal utility network effect | Definition
users personal identities are tied to the network in question, often with usernames tied to their real name
Multi (2) sided platforms usually exhibit……
These effect can require platforms to…
- high cross side network effects
- reach a critical mass of users within short time
(chicken egg problem)
Network effects on their own are not sufficient to sustain market power. In addition,
(1) must exist to keep customers.
switching costs
What might be reasons why there is a trend towards monopolies?
1.
2.
3.
4.
5.
- 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
