14: Firm Behavior in Monopolistic markets Flashcards
When does a firm have a monopoly in the production of a good x?
A firm has a monopoly in the production of a good x if it is the only supplier of this good.
What is different in this chapter than in all the other chapters? Which assumption changes?
In this case, we cannot sustain our previous assumption that the firm is so small that it just takes the market price as given (“price-taker”).
==> Instead, the monopolist can decide which price he wants to set.
What relation between the quantity it sells and the price it charges is there for the monopolist?
The more goods the monopolists wants to sell, the lower must be the price.
Which price strategies can the monopolist use?
- Optimal supply without price discrimination
- Optimal supply with perfect (first-degree) price discrimination
- Optimal supply with second-degree price discrimination
- Optimal supply with third-degree price discrimination
- Bundling of complementary goods
What does the decision of the pricing strategy depend on?
Which of these pricing strategies are available to the monopolist depends on his information, the type of good he is selling, and the market structure.
How is the elasticity of market demand for a monopolist? Why?
A monopolist can only sustain his monopoly for a particular good if the consumers cannot easily replace it by a different good.
==> Thus, the elasticity of market demand must be sufficiently low.
This effect becomes clearer if we have a look at the different reasons for the existence of a monopoly.
Which reson for the existence HAS to be fulfilled for a monopoly?
The consumer must actually differentiate the particular monopoly good against other goods (if it is not “special” in any way compared to other goods, it cannot be a monopoly)
In order to sustain a monopoly, the monopolist usually must obtain one of 5 advantages.
Which are these?
- Exclusive control over an indispensable resource
- Technological leadership
- Market entry is regulated by the government (patents) and the monopolist is already present in the market.
- Decreasing average costs (natural monopoly)
- Network externalities (like facebook: it only works because a lot of people are already there. If you start a new social network and only a few people join, it is useless)
Why do we need the marginal revenue?
If we want to find the optimal production and the optimal price of the monopolist, we are going to need another important concept: the marginal revenue
How is the marginal revenue defined?
The marginal revenue (MR) is the amount of money the firm receives if it sells an additional unit of the good.
The effect of an additional unit of production x on the revenue R
How do you calculate the revenue?
The revenue itself R is equal to the price of one unit p(x), multiplied by the number of units that are sold x. Thus, R = p(x)
What is the difference to revenue under perfect competition?
In a monopoly the price at which a good can be sold by a firm now depends on the quantity. Thus, we write p(x) instead of only p.
How do you calculate the marginal revenue?
We obtain the marginal revenue by differentiating R with respect to x.
p’(x) x + p(x).
Which comparison does a monopolist make to maximize her profit?
A monopolist that wants to maximize her profit compares the marginal revenue (“by how much does the next unit of production increase my revenue”) to the marginal costs (“by how much does the next unit of production increase my costs”).
If the marginal revenue exceeds the marginal costs, the monopolist should increase the production.
When should the monopolist increase production and when should they reduce it?
Marginal revenue > marginal costs –> an increase in production increases the profit
Marginal revenue < marginal costs –> an increase in production reduces the profit
