L7 Monopoly And Oligopoly

Question 1

Monopoly

Answer 1

The only supplier of a good for which there is no close substitute

Can set its price - not a price taker

Maximise profits by setting MR=MC

Downwards sloping demand curve

Question 2

Market power

Answer 2

Ability of a firm to charge a price above MC and earn positive profit

Question 3

Lerner Index

Answer 3

Ratio of difference between price and marginal cost to the price

Larger Lerner index = greater monopoly’s ability to set price above MC

Question 4

Ways the demand curve a firm faces becomes more elastic

Answer 4

1. Better substitutes for the firm’s product are introduced
2. More firms enter the market selling the same product
3. Firms that provide the same service locate closer to this firm.

Question 5

Essential facility

Answer 5

Scarce resource that a rival needs to use to survive

Question 6

Natural monopoly

Answer 6

Situation in which one firm can produce the total output of the market at lower cost than several firms could

Government frequently grant monopoly rights to public utilities to provide essential goods or services

Question 7

Patent

Answer 7

Exclusive right granted to the inventor or sell a new and useful product, process, instance or design for a fixed period of time

Question 8

Problems government face in regulation

Answer 8

1. They do not know the actual demand and MC curves and may set price at wrong level
2. Gov may use regulations less efficient than price regulation
3. Regulated firms may bribe or otherwise influence gov regulations to help firms rather than society as a whole

Question 9

Oligopoly

Answer 9

Small group of firms in a market with substantial barriers to entry

Question 10

Cartel

Answer 10

Group of firms that explicitly agree to coordinate their activities

Question 11

Cournot oligopoly

Answer 11

All firms are identical
Same cost functions
Produce identical or undifferentiated products

Firms make assumptions about the output produced by other firm

Question 12

Cournot equilibrium

Answer 12

Set of quantities chosen by firms such that no firm can obtain a higher profit by choosing a different quantity

Assumptions:
1. Market has 2 firms and no other firms can enter
2. Firms set their quantities independently and simultaneously
3. Firms have identical costs
4. Firms sell identical products