Monopoly Flashcards

Question

How do monopolies arise?

Answer 1

1) Cost advantages -> natural monopoly; high fixed costs, etc. 2) Government actions (i.e. patent)

Answer 2

US postal service Patent - if you're approved, you have a monopoly on providing a good for about 17 years. We create a DWL for those 17 years - but the government is okay with this because it promotes innovation/invention. Tradeoff between creating an inefficient monopoly vs. promote innovation

Answer 3

It depends on how much the demand curve shifts out from the promotion of innovation vs. how much the DWL is created from creating the inefficient monopoly

Answer 4

Removes poisoning effect for initial units and removes the monopoly's deadweight loss Optimal monopoly price regulation induces the monopolist to produce the efficient quantity, because there is no poisoning effect. There is no poisoning effect, because the monopolist does not have the option to raise the price above the efficient price. Producing the efficient quantity and offering it at the efficient price will decrease deadweight loss. Consumers will be better off because more transactions will occur at a lower price. The producer will be worse off, because they will not be able to use their market power to restrict quantity and raise price in order to extract additional producer surplus.

Answer 5

The government needs to know the demand curve and supply curve in order to determine what the efficient price ceiling will be. The current price and quantity are irrelevant to their decision if they know the demand curve and the supply curve.

Answer 6

The government can estimate the demand curve by asking consumers how much they value the good (contingent valuation) or studying the behaviors of consumers (revealed preference). Asking the monopolist will yield information about the supply curve, but not the demand curve. Optimal price regulation is the setting of efficient price ceiling not how to determine the demand curve.

Answer 7

If the price ceiling is below the marginal cost of the first unit, then the monopolist will lose money by producing the good, so it will shut down and the market for the good will disappear. This will increase deadweight loss because beneficial transactions will not occur.

Answer 8

Some market power, limited by barrier to entry A monopoly market with a threat to entry (barrier to entry isn't SO large that firms could enter at any time) i.e. airlines

Answer 9

When the government deregulated airlines, it turned out that airlines were a mostly contestable market. More companies entered the market. These companies drove down prices and increased the number of routes offered (increased quantity) just as theory would predict. Since airlines could compete on price, airlines reduced their number of amenities in order to reduce their prices. Before airlines could not compete on price, so they competed by providing more amenities. We know that this tradeoff between price and amenities increased social welfare, because if consumers demanded more amenities, then a popular airline would emerge that offered these additional amenities at a higher price. Since none of the major airlines offer such additional amenities, we can conclude that most consumers value the lower prices more than the additional amenities.

Answer 10

Giving the monopolist's profits back to consumers fails to eliminate the deadweight loss of monopoly A monopolist will charge a higher price that leads to a suboptimal amount of goods being purchased. The deadweight loss is actually the summation over the individuals who no longer purchase the good and not the transfer of consumer surplus to producers.

Answer 11

When the monopolist perfectly price discriminates, each consumer is charged exactly her marginal willingness to pay and there is no surplus for the consumers. It is true that perfect price discrimination maximizes total social surplus, but this only benefits the monopolist who sees her producer surplus increase.