Chapter 16- Monopoly Flashcards
Arises when there are no close substitutes
Barriers for another firms to enter same market
Monopoly arises when
Barrier to entry- any constraint that protects a firm from competitors is a barrier to entry
Natural
Ownership
Legal
Three type of barrier to entry
Exists when the technology for producing a good or service enables one firm to meet the entire market demand at a lower price than 2 or more firms could
Ex: PSE&G can meet the demand for electricity at a lower price than other distributors of electricity
Natural monopoly
Barrier to entry
OWNING a natural resource so other firms can’t buy it
Ownership
Barrier to entry
Creates legal monopoly
Legal monopoly- a market in which other competitors are restricted to make the same product by granting of a public franchise, government license, patent, or copyright
Legal
Barrier to entry
An exclusive right granted to a firm to supply a good or service Ex: U.S.P.S exclusive right to deliver first class mail
Public franchise
Controls entry into particular occupations, professions, and industries
Government license
Exclusive right granted to the inventor of a product or service
Valid for 20 years
Patent
An exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work
Copyright
Monopoly faces a tradeoff between price and quantity sold
To sell a larger quantity, monopolist must set a lower price
Two price setting possibilities that create different tradeoffs
Single price
Price discrimination
Price setting strategies
A firm that must sell each product (unit) at the same price to all its customers
DeBeers sells diamonds to all its customers at the same price
Produces smaller output and charges a higher price than perfect competition firms
Single price monopoly
Firms sell different units of the same good for different prices
Ex: airlines offer offer different prices for the same trip
Price discriminating monopoly
If a price fall increases total revenue, demand is elastic
If a price fall decreases total revenue, demand is inelastic
Marginal revenue=0 demand is unit elastic
A monopoly never has a profit in the inelastic range of the demand curve
Marginal revenue and elasticity
If Percentage change in the quantity demanded exceeds the percentage change in price, the demand is…
Elastic demand
If percentage change in the quantity demanded equals the percentage change in price
Demand is unit elastic
If the percentage change in quantity demanded is less than the percentage change in price
Demand is inelastic
Vertical distance(difference) in between total cost and total revenue curves is the economic profit
Profit maximizing price determined by demand curve
Resources are used efficiently when marginal benefit equals marginal cost
Monopoly’s profit maximizing output and price
Monopoly is inefficient creates a deadweight loss
Producer gains, consumers lose
Is monopoly unfair
Act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others
Always restricts competition
Consumer surplus- price consumers willing to pay and what they actually pay. They are willing to pay higher than the market price. Consumer surplus is above the market price on a graph
Rent seeking
Rent seeking costs are fixed costs that add to TFC AND ATC
Shifts ATC curve upward until it hits the profit maximizing price
Exhaust economic profit, consumer surplus shrinks, deadweight loss increases and might consume all profit
Rent seeking costs
Selling a good or service at a number of different prices
Ex: haircut for children is cheaper than haircut for adults
Key idea is to convert consumer surplus into economic profit
To be able to price discriminate, a firm must
Identity and separate different types of buyers
Sell a product that cannot be resold
Price discrimination
Firm offers different prices to different types of buyers, based on things like age, employment status, etc
Works when each group has a different average willingness to pay for the good or service
Price Discriminating among groups of buyers
Firm charges the same price to all customers, but offers a lower price for a larger number of units bought
Ex: $3 for one carton of juice, but $5 for two cartons of juice
Price discriminating among units of a good
To find economic profit, draw a rectangle connecting the points on the ATC and demand curve points where profit is maximized to the Y axis
To find economic profit
Removes the entire consumer surplus by charging the highest price that consumers are willing to pay for each unit
Demand curve becomes the marginal revenue curve
Price equals marginal cost in perfect price discrimination(efficient regulation of natural monopoly)
Rent seeking becomes profitable
Perfect price discrimination
Regulation achieves an efficient allocation of resources
Social interest theory
Regulation serves the self interest of the producer and results in maximum profit, underproduction, and deadweight loss
Capture theory
Average cost pricing
Government subsidy
Monopoly can avoid an economic loss through
Sets price equal to average total cost (ATC)
Average cost pricing
Direct payment to the firm, raised by the government by taxing some other activity, which will create a deadweight loss
Government subsidy
