Chapter 13 Flashcards
Five factors that lead to monopoly
1) Control over key inputs.
2) Economics of scale.
3) Patents
4) Network Economies
5) Government licenses
Monopoly is market structure in which…
…a single seller of a product with no close substitutes serves the entire market
The distinction between monopoly and competition is
Competition: the demand curve facing the individual competitive firm is horizontal
Monopolist: the demand curve is simply the downward-sloping demand curve for the entire market
What’s one practical measure for deciding whether a firm enjoys a significant monopoly power
Examine the cross-price elasticity of demand for its close substitutes
Natural monopoly
A market that is most cheaply served by a single firm
What determines if we have a natural monopoly
The degree of returns to scale, not the slope of the LAC curve
Economies of scale refers to
The situation where a single company with a large market share can produce goods at a lower cost per unit by producing in large quantities
Network economics
When a single product becomes dominant in the market, possibly via network effects that encourage the users to adopt a single product
Government licenses or Franchises
Where the law prevents anyone other than a government-licensed firm from doing business
The most important of the five factors for explaining monopolies that endure is
Economies of scale
Patents for example are transitory (not permanent)
The effect of downward sloping demand curve is that
Total revenue is no longe proportional to output sold
Marginal revenue is given by
MR = deltaTR/deltaQ
Optimally condition for a monopolist
A monopolist maximises profit by choosing the level of output where marginal revenue equals marginal cost
When Q is to the left of the midpoint of a straight line demand curve:
_____
when Q is to the right of the midpoint:
______
On the midpoint:
______
MR>0
MR<0
MR=0
What happens to the total revenue when the price elasticity of demand is unity?
The total revenue reaches its maximum value
The slope of the marginal revenue curve is
Twice that of the slope of the corresponding demand curve
(Only if the demand curve is also a straight line)
A monopolist who should shut down in the short run
Whenever AVG revenue (the price value on the demand curve) is lower than the average variable cost for every level of output
for a monopolist to sell a larger amount of output…
…it must cut its price - not only for the marginal unit but for all preceding units as well
The total revenue curve that a monopolist faces is
Concave with a maximum
Another useful way of thinking about marginal revenue…
…is to view it as the gain in revenue from new sales minus the loss in revenue from selling the previous output level at the
New
Lower
PRICE
The monopolist chooses a ________ output level than if he had used a competitors criterion because the monopolist maximises profit by __________
Lower,
Expanding output until MC = MR
For both the perfect competitor and monopolist
What is the relevant measure of the cost of expanding output???
Marginal cost
The monopolist has no supply curve. Rather he has a….
….supply rule which is to equate the MR and MC
The deadweight loss from monopoly (which measures the loss in efficiency in a market) is given by
The sum of the extra consumer and producer SURPLUSES that result from NOT exhausting all gains from exchange
5 options for policymakers to respond to inefficiency of a profit-maximising monopolist
1) State ownership or management
2) State regulation of Private monopolies
3) Exclusive contracting for Natural Monopoly
4) Vigorous Enforcement of Antittrust Laws
5) A Laissez-faire Policy Towards Natural Monopoly
X-inefficiency
A condition in which a firm fails to obtain maximum output from a given combination of inputs
A profit maximising monopolist will NEVER choose a price that leaves them on the inelastic portion of the demand curve
As it would always be possible to raise profits by increasing price
3rd Degree price discrimination
Different prices are charged in different markets or to different categories of consumer
Arbitrage
The purchase of something for costless risk free resale at a higher price
First degree price discrimination
Consumers are charged individual prices that capture ALL consumer surplus
Second degree price discrimination
Different quantities of the food sell for different prices
Total demand is highest when…
…price elasticity of demand is 1
