Chapter 9 Flashcards
What is market power?
this is a company’s ability to influence the market price of its products.
What is a monopoly?
This is a market served by only one firm. This is the most extreme case of market power.
What is a monopolist?
This is the sole supplier and price setter of a good on the market
What are barriers to entry?
These are factors that keep entrants out of the market despite the fact that the market has a high consumer surplus.
Name the five types of monopoly
- Natural monopoly
- Switching costs
- Product differentiation
- Absolute cost advantages or control of key inputs
- Government regulation.
What is a natural monopoly?
This is a market in which it is the most efficient to let a single firm produce the entire output. Cost curve shows economies of scale regardless of output level. The LATC slopes downward and happens when each producer has the same marginal costs and there are high fixed costs.
What are switching costs?
These are costs that consumers have to pay to switch to a competing product. These can make it very hard to enter. Most extreme version is a network good
What is a network good?
This is a good whose value to each consumer increases with the number of other consumers using the product. (Instagram)
What is product differentiation?
this means that there is imperfect substitutability accross varieties of a product. This is based on consumer preferences and prevents new firms to come in and lower their prices to attract market share.
What are absolute cost advantages or control of key inputs?
If your costs are lower, you can sell for lower. This can also mean that you are the only one of one of only few to possess a scarce resource.
What is an oligopoly?
This is a market structure that is characterized by competition among a small number of firms.
What is monopolistic competition?
This is a type of imperfect competition where a large number of firms have some market power, but each firm makes no economic profit in the long run. Firms in this market produce heterogeneous goods.
What does steepness of a demand curve indicate for firms with market power?
- Steep curve: price falls a lot in response to small increase in output. Steeper curve means that profit-maximizing quantity is reduced
- Flat curve: Q changes a lot in response to price change.
What is a markup?
This is the percentage of a firm’s price that is greate than its marginal costs. This markup will depend on the price elasticity of demand. More elastic menas that the optimal markup as a percentage of price falls.
What is the Lerner index?
This is a measure of a firm’s markup and its market power. The higher this index is, the more the firm can price its goods above MC
