Market power Flashcards
What are the 3 key features of monopoly profit maximisation?
Monopolists are price-makers
Monopoly output is market output
Monopoly demand curve = market demand curve
How does a monopoly maximise profits?
Sets MR = MC but MR is not constant
How can you find marginal revenue from price and elasticity of demand?
MR = p[1+1/e] e= elasticity of demand
What does the Lerner index show?
Examines how elasticity affects a monopoly’s price relative to it’s MC
What is the lerner index of a competitve firm?
0
How does the Lerner index change as the firm increases it’s market power?
Lerner Index approaches 1 as a firm has more market power (less elastic demand)ha
What does the ratio of price to MC depend on?
The elasticity of demand at the optimal quantity
What does more elastic demand mean for a monopoly?
More elastic demand means that a monopoly loses more sales when raising it’s price
When does demand become more elastic?
- As better substitutes arise
- As more firms enter the market
- As firms that provide the same service locate closer to the firm
How do tax increases affect the monopoly?
- Reduces it’s output
- Raises it’s price
Who will have to pay the value of the tax?
Consumer price may rise by an amount greater than the tax because the monopoly operates on the elastic portion of the demand curve
What are the two causes of monopolies?
Cost advantage over other firms
Government created monopolies
What are sources of cost advantages?
- Control of an essential facility (scarce)
- Superior technology
- Protection from imitation through patents or informational secrets
What is a natural monopoly?
A market has a natural monopoly if one firm can produce the total output of the market at a lower cost than several firms could (public utilities)
Why is a natural monopoly feasible?
Because a natural monopoly benefits from economies of scale at all levels of output so average cost falls as output increases
