Chapter 14 - Monopoly Flashcards
What is monopoly?
a firm that is the only producer of a good or service with no close substitutes.
When is a firm a perfect monopoly?
if it controls the entire market.
When does a firm have monopoly power?
if it can manipulate the price
Why do monopolies exist?
because of barriers to entry that prevent other firms from entering the market:
- scarce resources
- economies of scale
- governmental intervention
- aggressive business tactics
What does scarce resources mean?
not possible to enter the market because there is scarcity resources or input of the production process
Economies of scale
high fixed costs are better to produce at larger scale to take advantage of economies of scale
- new firms are prevented to enter the market because of this
- natural monopoly
What is a natural monopoly?
refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms.
eg. electricity, drinking water, natural gas
What is government intervention?
monopoly created or sustained by governments where they would not otherwise exist
- to protect consumers
- for state-owned firms
- to protect intellectual property rights
Aggressive business tactics
incumbent firm prevent new entries
- acquiring competitors
- predatory pricing = temporarily slashing prices until rival local stores are forced out of business
- threatening them
Monopolists and the Demand Curve
face downward-sloping market
- a monopolist can charge any price, but the price affects the quantity demanded
Monopoly Revenue
when a monopolist produces more of a good, the market price is driven down
- in a competitive market, a firm can sell as much as it wants without changing the market price
- Quantity effect: TR increases
- Price effect: TR decreases
Profit-maximizing quantity of output for a monopoly
found where Marginal Revenue = Marginal Cost
How do you calculate profit?
Profit = (P-ATC) x Q
- when price is greater than ATC, profits will be positive even in the long run
The welfare costs of monopoly
a monopoly’s ability to keep quantities low and prices high hurts society in general and consumers in particular
- welfare costs associated with monopolies is a positive statement (fact)
- many voters and policy-makers make normative statements concerning monopolies (how should be)
Public policy responses: Antitrust Laws
Competition Act =
- to promote the efficiency and adaptability of the Canadian economy
- to expand opportunities for Canadian participation in world markets
- To ensure that small and medium-sized enterprises have an equitable opportunity to participate
- to provide consumers with competitive prices and product choices
Public policy responses: Public ownership
- natural monopolies occur when one firm can achieve lower costs of production than multiple firms
- a public policy response to natural monopolies is to allow the government to run them
Pros = set prices lower and provide broader services
Cons = political pressure, loss of profit incentive
Public policy responses: Regulation
- takes the form of price controls
firms have an incentive to avoid releasing information about their true production costs
Public policy responses: Vertical Splits
introduce competition into parts of the monopoly
- split original firm into companies that operate at different points in the production process
(horizontal split = monopolist is separated into several firms that compete with each other)
Public policy responses: no response
might be preferable if regulation is difficult and or ineffective to establish and manage
- common when government interventions are subject to corruption or political mishandling
What is price discrimination?
the practice of charging customers different prices for the same good (to increase monopoly profits)
