CHAP. 10 Flashcards
HOW’S THE DEMAND CURVE FOR A MONOPOLIST
Negatively sloped
WHAT IS THE TOTAL REVENUE OF A MONOPOLIST IF IT CHARGES THE SAME PRICE FOR ALL UNITS SOLD
TR = p x Q (in a perfect competiton market)
WHAT IS THE AVERAGE REVENUE
AR = TR/Q = (pxQ)/Q = p
So the demand curve is the average cost if monopolist
WHAT IS THE MARGINAL REVENUE
The revenue resulting from the sale of one more unit of the product: MR = CHANGE IN TR/CHANGE IN Q
The Monopolists MR curve lies below the demand curve
WHEN IS THE MONOPOLIST MAXIMIZING ITS PROFITS
Q* where MC = MR
The price is determined by the demand curve
When p is greater ATC, the monopolist is making economic surplus
See screenshot
DOES A MONOPOLIST HAVE A SUPPLY CURVE
NO, because it is not a price taker.
PERFECTLY COMPETITIVE MARKET VS MONOPOLY
–The level of output in a monopolized industry is lessthan the level of output that would be produced if the industry were perfectly competitive.
–For a perfectly competitive market, p= MC–For a monopoly, p> MC
–In a monopoly, the marginal value to society of extra units, as reflected by the price, exceeds the marginal cost of producing the extra units
–More economic surplus would be generated for society if the monopolist increased its level of output.
–The monopolist’s profit-maximizing decision to restrict output below the competitive level creates a loss of economic surplus for society—a deadweight loss.
–A monopoly leads to market inefficiency.
HOW DO PROFITS PERSIST IN A MONOPOLY
The entry of new firms must be prevented
HOW CAN THE ENTRY OF NEW FIRMS BE PREVENTED
–An entry barrier (natural vs. created = PATENTS)
–A natural monopoly
–Network effects:
EFFECTS
*Benefits to the user depend on how many others use the product.
*Powerful entry barriers that can help to sustain monopoly profits.
*An age-old example is the telephone
WHO DEFENDED MONOPOLY ON THE BASIS THAT THE PURSUIT OF MONOPOLY PROFIT PROVIDES INCENTIVES TO CREATE
Joseph Schumpeter
WHAT DO CARTELS DO
Fix the price as a monopoly would
Share the profit between members
WHAT PROBLEMS DO CARTELS FACE
Cartels tend to be unstable because members have an incentive to cheat.
But if all firms cheat, the price falls back toward the competitive level, and joint profits will not be maximized
- Must prevent entry of new producers can license the firm and so control entry by restricting the number of lisences
WHAT IS PRICE DISCRIMINATION, WHEN ARE PRICES DISCRIMINATORY
The sale by one firm of different units of a product at two or more different prices for reasons not associated with differences in cost.
When price differences are based on different buyers’ valuations of the same product, they are discriminatory.
WHEN IS PICE DISCRIMINATION POSSIBLE
1.Market Power
2.Different Valuations of the Product
3.Prevent Arbitrage (buy good product cheap and sell it expensive)
WHAT ARE DIFFERENT FORMS OF PRICE DISCRIMINATION
*Price Discrimination Among Units of Output–A firm captures consumer surplus by charging different prices for different units sold.
*Price Discrimination Among Market Segments–Easier for firms to distinguish between different market segments than it is to detect an individual consumer’s willingness to pay for different units of that product.–Price discrimination among market segments is more common than price discrimination among units
*Hurdle Pricing–Hurdle pricing exists when firms create an obstacle that consumers must overcome to get a lower price.–Consumers then assign themselves to the various market segments—those who don’t want to jump the hurdle and are willing to pay the high price, and those who choose to jump the hurdle to benefit from the low price.–A familiar example is coupons for discounts at grocery stores.
