Chapter 8: pure monopoly Flashcards
What does it mean to be a price maker?
A firm can confront the usual downward sloping product demand curve and can change its product price by changing the quantity produced
What causes blocked entry in a monopoly?
- economies of scale
- patents and licenses
- ownership or control of essential resorces
- pricing and other strategic barriers to entry
What is a patent?
The exclusive right of an inventor to use or allow the use of their invention
Examples of licensing
- FCC licenses only so many radio and television stations in a geographical area
- in larger cities, one of a limited number of municipal licenses is required to drive a taxi cab.
Why is marginal revenue less than price in a pure monopoly?
Because the lower price of the extra unit also applies to all prior units
What is control of essential inputs?
A single firm can control an input essential to the production of a given productand that firm will have market power (ex. De Beers diamonds)
What is strategic pricing?
Entry may effectively be blocked by the way the monopolist responds to attempts by rivals to enter the industry
Examples of strategic pricing
- slashing prices
- stepping up its advertising
What is the root problem of the breakdown of the invisible hand in a pure monopoly??
The MR curve lies below the demand curve (the benefit to the monopolist of expanding output is less than the corresponding benefit to society
What is price discrimination?
The practice of charging different buyers different prices for the same good or service (ex: movie tickets)
Three conditions for price discrimination:
1) Seller must have some ability to control product output and price (monopoly power)
2) Seller must be able to segregate buyers into distinct classes with different willingness or ability to pay for product (market segregation)
3) No resale: the original purchaser in the discounted market cannot resell the product or service and regular price in undiscounted market
What are antitrust laws?
When monopoly power results in adverse affects upon the economy, the government may choose to intervene using anti-trust laws
Sherman Act (1890)
declared illegal any conspiracy to monopolize or attempt to monopolize any part of trade or commerce
Clayton Act (1914)
aimed to prevent corporations from acquiring shares in a competitor if the transaction would “substantially lessen competition or create a monopoly
