Monopolies Flashcards
Monopoly firms are price ____
makers
Monopoly
firm is monopoly if it is sole seller of product that doesn’t have close subsitutes
Why do monopolies arise
Barriers to entry caused by:
1) Monopoly resources = single firm owns key resource for production
2) govt regulation = govt gives single firm exclusive right to produce good/service
3) production process = single firm produces output at lower cost than larger # firms can
Exclusive ownership of key resource
1) one way monopolies rise BUT not common in practice
Govt created monopolies
1) Patents + copyright laws –> gives company exclusive right to make/sell drug or copyright over a novel
2) creates monopolies BUT encourages more research + better writing
Natural monopolies
1) when single firm can supply market with good/service at lower cost than 2 or more firms could
When do natural economies arise
1) when ATC curve continually declines SO if more firms join then the ARC would rise since each firm produces lesser
2) therefore makes most sense for single firm to produce at lowest cost
example of natural monopoly
1) Bridge that is rarely used –> never congested
2) as more people use it the ATC decreases since the marginal cost of additional users is negligible
Difference btwn monopoly versus competition
1) Monopoly can influence price of its output
2) Demand curve for competitive firm horizontal BUT its downward sloping for monopolistD
Demand curve for monopoly
1) Since sole producer in market –> demand curve is market demand curve
2) Constrains monopoly’s ability to profit from market power since if they increase price too much, demand would decrease
Marginal Revenue vs Price of good for monopoly
1) Marginal revenue less than price of good BECAUSE of downward-sloping demand curve
What happens when monopoly increases amount it sells
1) Output effect = more output sold –> increases total revenue
2) Price effect = price falls –> decreases total revenue
marginal revenue can be negative when price effect outweighs output effect
What is Qmax for monopoly
1) intersection of MR + MC curves
2) BUTTTT P > MR = MC, so the price exceeds marginal cost in monopolies
Equation of Profit
(P-ATC) * Q
SO:
1) (Point on demand - point ATC) * Q
If a monopoly’s fixed costs increase, its price will ____ and its profit will _____
1) stay the same, decrease
2) Price determined –> MC = MR BUT the an increase in fixed costs does not affect marginal cost so price stays same
3) Price is the same, but since profit = TR-TC, we know TC increased since TC = FC + VC
Why is DWL in monopoly
1) DWL caused bc monopoly charges more than intersection of MC + MR
2) Height = monopoly price (demand) - monopoly quantity (intersection MC MR)
3) Base = Efficient quantity - monopoly quantity
monopoly underproduces
Compared with social optimum, monopoly firm choses
1) quantity that is too low + price that is too high
DWL from monopoly arises because
some potential consumers who forgo buying the good value it more than its marginal cost
Price Discrimination
1) selling same good to different customers for different prices even though costs of producing good is same
Three lessons from price discrimination
1) rational strategy for profit-maximizing monopolist
2) sellers must be able to separate customers based on willingness to pay (arbitrage –> buying good in one market at low price + selling in another
3) can raise welfare as measured by total surplus –> reduces DWL
Perfect price discrimination
1) situation where monopolist knows exactly customer’s willingness to pay + charges each customer different price
2) NO DWL
When a monopolist switches from charging a single price to practicing perfect price discrimination, it reduces
1) consumer surplus
2) essentially goes to 0 since everyone pays exactly what they want
How can governments deal with monopolies
1) making monopolized industries more competitive
2) regulating behavior of monopolies
3) turning private monopolies into public enterprises
4) doing nothing
Increasing competition with antitrust laws
1) Govt must compare synergies (advantages from increased efficiency of joint production) with disadvantages of reduced competition
2) govts wary of horizontal mergers (within same industry)
Regulation
1) For natural monopolies –> cannot charge where MC = ATC since that would cause a loss + they would leave (bc of downward sloping ATC)
SO SOLUTIONS
1) Subsidize monopolist (govt pick up loses in MC pricing)
2) Allow monopolist to charge price higher than marginal cost + pick up difference
PROBLEM –> no incentive for monopolist to reduce prices
Public ownership
1) Govt can run monopoly itself
2) Economists prefer private since private sector incentivized to keep prices low BUT public sector isnt since govt will just use taxpayer money
No intervention with monopolies
1) do nothing –> bc intervention has negative consequences
