Chapter 9.1: Monopoly Flashcards
Conditions of a Monopoly
- One large firm (firm is market)
- Unique product (no close substitutes)
- High barriers to entry (no competition)
- Price makers
- Inefficient (creates DWL)
Barriers to Entry
Legal, technological, and market forces that discourage or prevent potential competitors from entering the market, so that monopolies can sustain economic profit in the long run.
Natural monopoly
Occur when the barriers to entry are due to economies of scale or control of physical resource.
Legal Monopoly
Occurs when there are legal barriers against competition, such as regulation and intellectual property protection.
Natural monopoly: Economies of Scale, examples
Explain fig. 9.1
Happens in industries where the MC of adding another customer is very low when the FC on overall systems are in place (ie. electric and water company), so it is natural for only one firm to produce bc they can produce at the lowest cost.
Natural monopolies can arise . . .
- In industries where the marginal cost of adding customer is very low, when the fixed costs of the overall system are in place.
- When a company has control of scarce physical resource.
- In smaller local market for products that are difficult to transport.
Intellectual property (IP)
The body of law including patents, trademarks, copyrights, and trade secrets that protect the right of inventors to produce and sell their inventions.
Patent, Trademark
Patent: gives inventor exclusive legal rights to make, use , or sell the invention for a limited time.
Trademark: an identifying symbol or name for a particular good.
Copyright, Trade secrets
Copyright: Legal protection to prevent copying of original works for commercial purposes.
Trade secrets: methods of production kept secret by producing firm.
Predatory Pricing
A firms uses the threat of price cuts to discourage competition.
How do demand curves of perfectly competitive firms and monopolies differ?
Relationship between demand (AR) and MR
Perceived demand is market demand bc the firm is the market. MR is always less than demand (price line) for imperfectly competitive firms because to sell another unit, they need to lower the price for all units, including the units they could’ve sold for a higher price.
:) monopoly gang sign
Total revenue and MR
Since monopolists face a downward-sloping demand curve, the only way to sell more output is by reducing its price. Selling more raises revenue, but lowering price reduces it. Therefore, TR for a monopolist has the shape of a hill: first rising to a maximum then falling.
What will happen to a monopoly that makes profit in the long-run?
Nothing, no firms will try to compete because there are high barriers to entry, meaning the firm is able to sustain econ. profit in the long-run. For this reason the short-run and long-run graphs are one and the same.
To maximize TR, monopoly should. . .
produce where MR is 0.
Elasicity of demand
split where MR is 0 or TR is maximized. Left side is elastic, right is inelastic. Monopolies always produce where demand is elastic.
To maximize profit, monopolies should produce at. . .
where the difference of TR and TC is largest. Or where MR=MC.
Are unregulated monopolies allocatively efficient?
No, allocative efficiency is where D = mc. Monopolies produce at MR = MC, but P > MC = MR.
Price discrimination
see GD
Firm charges each consumer what they’re willing and able to pay, so that price charged per consumer varies.
If a monopoly saw an increase in fixed costs (ie. a lump-sum tax), how will profit-maximizing q and profit be affected?
A change in fixed costs shifts ATC but not MC. So, the profit maximizing price and q (where MR = MC) will stay the same, but profit would be decreased.
How to determine profit-maximizing quantity and price
- Determine q where MR = MCA
- Draw line straight up to demand curve. This is the price.
- Calculate TR, TC, and profit and average profit.
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Why do neither monopoly nor monopolistic competition achieve productive efficiency in the long-run?
Because price is always higher than min. ATC for price setters.
Requirements to apply price discrimination
- Have monopoly power (must be price maker)
- Must be able to segregate the market.
- No resale
What would happen if there was a per unit tax?
MC curve would shift up.
Why do underegulated monopolies generate DWL?
Bc they produce where MR = MC, but set their prices high.
