7. Monopoly Flashcards
Market Failure
people tend to make decision that benefit themselves rather than the collective interest, therefore the government intervenes to influence the consumers’ behaviour
Market Power
Firms are Price-Maker because it has the ability to set its own price, therefore it has Market Power.
Assumptions of imperfect market
- consumers/ suppliers are NOT price-takers
- Goods are homogeneous
- There are externaities
- Goods are NOT excludable and rival
- Imperfect (not full) information
- NO free entry and exit
Increasing Return to Scale (IRS)
There are increasing returns to scale (economies of scale) when the average cost of producing a certain good decreases with the amount of the good produced.
Natural Monopoly
A monopoly that occurs because of increasing returns to scale.
Monopoly
A market structure where there is only one firms operating in the market.
Monopolistic Competition
a large number of firms, each producing slightly differentiated goods (perfect substitutes)
Oligopolistc Competition
a small number of firms selling goods that are close substitutes
Price discrimination
Price discrimination is the practice of charging different consumers different prices for exactly the same product.
Imperfect market—the market is perfect except the following assumptions:
- consumers/ suppliers are NOT price-takers
- Goods are homogeneous
- There are externaities
- Goods are NOT excludable and rival
- Imperfect (not full) information
- NO free entry and exit
Barriers to entry
- control over scarce resources
- government-created barriers (patents, copyrights, licenses )
- increasing returens to scale (IRS)
- network economies
- high start-up cost
Government Regulation to solve inefficiency
- Establish competition laws— a law that is intended to foster market competition by regulating the anti- competitive conduct of firms — ensures that consumers are charged the lowest possible prices
- Average Cost Pricing— a policy through which the government forces the monopolist to set the price and quantity at the intersection of the ATC and the demand curve. This eliminates any positive profit accrued to the monopolist.
Challenges of implementing Average Cost Pricing (Fair Return) :
- government doesn’t know the exact ATC
- once implemented, firms have no incentives to invest in new technology to lower their costs
- when implemented, the firm’s output is allocatively inefficient (the price exceeds marginal cost P> MC)
The Principles of Price Discrimination:
- If the demand curves are different, it is more profitable to set different prices in different markets
- the price should be higher in the market with more inelastic demand - Firms must have price-making ability
- No Arbitrage (buy low, sell high) /Trade, prevent reselling
e.g. smuggling is an illegal way to prevent price discrimination
If you price discriminate, D= MR (demand curve equals to marginal revenue curve) (perfect price discriminate)
First Degree(Perfect) Price Discrimination :
The monopolist knows the reservation price of each consumer and is able to charge each consumer his marginal benefit (reservation price) based on their willingness to pay.
Perfect Price Discrimination:
- MR= D
- Uneven distribution of surplus
- No consumer surplus and deadweight loss— extracts all consumer surplus
- Profit and producer surplus is maximised ( triangle above MC curve)
- sell socially optimal quantity (max. social surplus)
