Chapter 14 Flashcards
What is a Monopoly?
Monopoly :
Firm has no competition
Firm is able to totally control what it charges for its products (Price maker)
Key characteristic of monopoly market is barriers to entry into the market.
Perfect monopoly:
Controls 100 percent of the market in a product
Firms can still have a large degree ofmonopoly powerif
they control slightly less than 100 percent of the market
What is a Barriers to Market Entry?
Barriers to Market Entry:
Ownership of Resources without
Close Substitutes
Problems in Raising Adequate Capital
Economies of Scale
Predatory Behavior
Legal or Governmental Restrictions
-Public Franchises and Licenses
-Patents and copyright
-Tariffs.
Natural monopoly
Market where a single firm can produce, at a lower cost than multiple firms.
What is a Barriers to Market Entry? 2
Barriers to Market Entry:
Aggressive tactics:
Exclusivity agreements
Buying out competition
Aggressive persuasion
Predatory pricing - temporarily slashing prices until rival local stores are forced out of business
Buying innovation
Example: Google buying YouTube
Monopolies Diagram:
Maximize profit by producing quantity where MC = MR
Sets the price based on the demand for that quantity
- The profit-maximizing quantity is found at the intersection of the MC and MR curves
- Price is determined by the point on the demand curve that corresponds to the profit-maximizing quantity
Monopolies Expanded: How they work in different markets?
In competitive market, MR = P
In monopoly market P > MR; therefore, P > MC at the optimal production point
- Profit = (P − ATC) × Q
Monopolist can achieve lower costs of production than multiple competing producers would, but even a natural monopoly chooses to produce at a P > MC , causing deadweight loss
Monopolies Expanded: Diagram and the points on the diagram
Monopolist sets price at point A on demand curve, which matches profit-maximizing quantity
Profit = (P − ATC) × Q
The triangle ABC in the diagram is a deadweight loss
For For monopoly market, MR = MC at Point B where P = 4,500 and Q = 4
For perfectly competitive market, MR = MC at Point C where P = 4,000 and Q = 5
What is Price Discrimination?
Price discrimination
-Practice of charging customers different prices for the same good
-Involves discriminating between customers on basis of their willingness to pay
Necessary Conditions for Price Discrimination
-Downward-sloping demand curve
-Ability to separate markets at a reasonable cost
-Buyers in various markets must have different price elasticities of demand
-Ability to prevent resale of the product or service
What is Market Power and Price?
More monopoly power means greater ability for price discrimination
The following diagram shows the demand for MS Office in a perfectly segmented market
What are Problems with Price Discrimination?
Difficulty in defining categories of customers
Many products can easily be resold
Identifying each customer’s willingness to pay is challenging.
(Need to read the minds of each individual customer and form accurate impression of how much that customer would be willing to pay (big data)
What is Social Evaluation of Monopoly?
Monopolies can earn excess profit, which creates unequal distributions of income.
Reasons to allow Monopolies:
- Monopolies are created when patents are issued, and this encourages valuable inventions and promotes economic growth.
What is The Regulation of a Natural Monopoly?
Policy makers developed several policy responses to monopolies to break up monopolies, prevent new ones, and ease the effect of monopoly power on consumers.
Competition Act - administered and enforced by the federal Competition Bureau to
- Promote efficiency/adaptability in Canadian economy
- Expand opportunities for Canadian participation in world markets
- Ensure small/medium companies have equitable opportunity to participate in the Canadian economy
- Provide competitive prices and product choices
What is The Regulation of a Natural Monopoly? 2
1) Marginal cost pricing:
Sets price at the intersection of the MC and the demand curve.
2) Average cost pricing:
Sets price at the intersection of the ATC and the demand curve.
Vertical splits - split an industryverticallyto introduce competition into parts of it
- Vertical split divides the original firm into companies that operate at different points in the production process
