6 - Monopolies

Question 1

Definition Monopoly

1.
2.
3.

Answer 1

• market with a single supplier / seller
• supplier is facing the whole market demand
• e.g. private postal services like DHL, local public transport (ASEAG)

Question 2

Definition Monopsony

1.
2.
3.

Answer 2

• market with a single customer / buyer
• consumer is facing the whole market supply
• e.g. police equipment to the police, railway tracks to the deutsche bahn

Question 3

What is the Market power of a monopolist?

1.
2.
3.
4.

Answer 3

• ability of the supplier to affect or even set prices
• price setting instead of price taking
• marginal revenue does not equal price: lowering price to increase demand
• possibility of price differentiation / price discrimination, i.e. differing prices for different customers

Question 4

What is the Market power of a Monopsonist?

Answer 4

• ability of the customer to affect or even set prices

Question 5

What are the conditions in Monopolists´Profit Maximization?

Answer 5

• FOC: MR = MC -> profits optimal if equal | Revenue of the last unit sold equals cost of the last unit sold
• SOC: MR´< MC´-> profits maximized if slope of MR smaller than slope of MC | additional revenue of increasing production is smaller than additional costs
• production condition: p > (oder gleich) AVC -> no negative contribution margin

Question 6

when do we have a loss in consumer surplus?

Answer 6

higher prices for quantity supplied + less quantity supplied

Question 7

When do we have a gain in producer surplus?

Answer 7

higher prices for quantity supplied - less quantity supplied

Question 8

Whats the welfare loss? / deadweight loss?

Answer 8

less quantity supplied + less quantity supplied

Question 9

Natural Monopoly

A. What are conditions here?
1.
2.

B. What are the consequences?
1.
2.

C. What are examples?
1.
2.

Answer 9

• increasing returns to scale/ economies of scale
• ## increasing scale always reduced costs per unit (MC, AC)
• price-cutting competition until monopoly
• ## monopolistic price setting
• goods/ services based on networks/ grids
• electricity networks, IT-networks, railroad networks

Question 10

1. Monopoly without regulation?
2. Monopoly with regulation?
3. Natural Monopoly with regulation?

Answer 10

1. MR(Q) = MC(Q) P > MC(Q)
2. P = MC(Q)
3. MC(Q) < ATC(Q) P NOT MC(Q) P=ATC(Q)