3.4.5 Monopoly Flashcards
Monopoly
A market structure with a single seller with no substitutes
Monopoly Characteristics
Market Power
Insanely High Barriers to Entry/Exit
<25% Market Share
Price discrimination
When a firm charges a different price for the same good/service to Rev Max
Third Degree Price discrimination
when a firm charges different prices to different consumers for the same good/service
Conditions required to Price discriminate
Market Power
Varying Consumer Price Elasticity of Demand (PED)
Ability To Prevent Resale
Costs & Benefits of Third-Degree Price Discrimination to Consumers
Consumers lose as they pay higher prices
Other consumers will benefit as they take advantage of the lower prices
Some consumers will gain as a higher price decreases the quantity demanded & in some markets, this can increase consumer utility
Costs & Benefits of Third-Degree Price Discrimination to Producers
Total revenue of producers increases leading to higher profits
Firms increase their producer surplus at the expense of a decrease in consumer surplus
Setting up & enforcing price discrimination can increase average costs
Monopoly Advantages to Firms
Generates supernormal profits for investment
Global competitiveness due to market power
Economies of scale lower average cost
Monopoly Disadvantages to Firms
Reduced efficiency without competition
Cross subsidization inefficiencies
Misallocation of resources; P > MC
Limited innovation without competition
Monopoly Advantages to Consumers
Lower prices through cross-subsidization
Lower prices due to economies of scale
Monopoly Disadvantages to Consumers
Higher prices with no competition
Limited innovation and lower quality
Poorer customer service
Increased prices on some products
Natural monopoly
When the most efficient number of firms in the industry is one due to associated Infrastructure issues
Why are natural monopolies regulated?
Usually occur in utility industries & are regulated to ensure that consumers are not charged higher monopoly prices
