Monopolies Flashcards
What is a monopoly?
A firm that is the only seller of a produce which has *no close substitutes*.
What is the other extreme to monopolies?
a perfect competitive market
What is the main difference between a monopoly and a perfectly competitive market?
A monopoly firm has market power, the ability to influence market price of the product it sells(price maker). Whereas a competitive market has no power(price taker).
What is the main cause of monopolies
Barriers to entry. There are three sources to barriers to entry:
1. A single firm owns a key resource(which does not happen often)
2. The government gives a single firm the exclusive right to produce the good.
* -The government might grant monopolies the exclusive right to produce a good because doing so is viewed in public interest(sometimes)* * -ex. Drug companies are allowed to have exclusive right since it encourages desirable behaviour(encourages more research)* * -author gets exclusive right to books(writes more books) Thus laws governing patents and copyrights have benefits and costs* * Benefit:increases incentive for creative activity Cost:benefit is offset to an extent by costs of monopoly pricing*
3. Natural Monopoly: a single firm can produce entire market Q at a lower cost than could several firms.
ex. a city that has a bridge with a toll free for consumers who use the bridge. The bridge is a club good since it is excludable, but not rival in consumption.
In a competitive market, the market demand curve slopes which way?
It slopes downward.
What about the demand curve for any individual firm’s product?
The demand curve for the firm is horizontal since firms in a competitive market are price takers. This allows them the advantage of increasing Q without lowering P.
Therefore MR=P for the competitive firm.
*The increase in revenue that results from the sale of one additional unit of output. Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity. While marginal revenue can remain constant over a certain level of output, it follows the law of diminishing returns and will eventually slow down, as the output level increases
Perfectly competitive firms continue producing output until marginal revenue equals marginal cost.
What kind of demand curve does the monopolist have?
A monopolist is the only seller. So it faces the market demand curve. To seller a larger Q, the monopolist must reduce P. This causes the demand curve of the monopolist to be downward sloping.
Thus MR does not = price.
A monopolist’s MR is always less than the price of its good. MR is lower since a monopoly faces a downward sloping demand curve.
Instead, the average revenue is equal to price in a monopoly
Average revenue is also equal to price in a competitive market.
The marginal revenue curve is always less than the demand curve. The marginal revenue curve shows how firm’s revenue changes when Q increases by 1 unit. Since price of all units fall if monopoly increases, production MR
What Q is increased, what two effects happen unto revenue?
Output effect: higher output raises revenue
price effect:lower price reduces revenue.
To sell a larger Q, the monopolist must reduce the price on all units it sells. So MR
MR could even be negative if the price effect exceeds the output effect(eg. when Second Cup increases Q from 5 to 6)
How does a monopolist maximize profit?
Just like how the competitive market firms do: MR=MC
Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity
it finds the price on the D curve
How do monopolists figure out how to charge consumers?
At profit maximization of Q where MR=MC
Finding the Price from the demand curve at the sam quantity
(basically increasing price whilst selling at a low quantity).
Prince discrimination? What is the characteristic used to dicriminate buyers?
Selling the same good at different prices to different people(based on a certain characteristic of them ex. race, religion, gender)
Monopolies discriminate based on people’s willingness to pay. A competitive firm on the other hand, cannot discriminate(they are price takers)
What is economies of scale and diseconomies of scale?
answer this fool
What is perfect price discrimination?
The monopolist producees, the competitive quantity, but charges each buyer his or her WTP. The monopolist will then collect the CS. There is no DWL in perfect price discrimination.
(also, MC=ATC here)
In reality, perfect price discrimination is not possible. Firms don’t know people’s WTP. So firms divide customers into groups based on some observable trait that it likely related to WTP like age.
Give some examples of WTP in price discrimination
These examples do not just apply to monopolies. They would be oligopoly or monopolistic competitive.
Movie tickets- Discount for students, and seniors. Going at the middle of the day, movies cost more so their WTP is high. In contrast, people who go to movies on fridays have a lower WTP.
Airline prices-people who use airlines on holidays have a low WTP whereas people who use airlines during weekdays and non holidays usually travel for business(have somewhere to be at that day at that time) so they have high WTP. The meetings and times are important so they can afford for a higher WTP.
Quantity discounts-A person’s WTP declines with each additional units. ex. smal popcorn is $4, a popcorn twice as big is only $5.
As we can see, timing is also a price discrimination(ex. new video game–highest price for ppl with high WTP. after a few months, price goes down)
Some public policy toward monopoly
- increasing competition with antitrust laws
- ban some anticompetitive practices, allow govt to break up monopolies.
- creates agencies to crack down momos
regulation-usually for natural monos
-MC<atc></atc>
<p>-Electricity is usually a natural monopoly. (or owned by the gov't to make sure price stays low)</p>
<p>-gov't agency set monopolist's price.</p>
<p></p>
<p><strong>Do nothing</strong></p>
<p>-foregoing policies all have drawbacks, so best policy may be no policy</p>
<p>-"treatment is worse than the disease"</p>
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