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ECON2101 > Monopoly > Flashcards

Monopoly Flashcards

1
Q

Why do monopolies arise?

A

Arise because of barrier to entry

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2
Q

What kinds of barriers to entry are there?

A
  • Technical Barriers
    • Possess some ownserhip of special knowledge or low cost production methods
    • May own a unique resource
    • Natural Monopolies
  • Legal Barriers
    • Legal protection provided by a patent
    • Exclusive franchise or license
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3
Q

What are natural monopolies?

A
  • If production of a good exhibits decreasing AC over wide range of output: IRTS, large scale firms will be more efficient
  • Usually have some high fixed/set up cost
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4
Q

What is the operation of a monopoly?

A
  • Set Q where MC = MR

- Face downward sloping demand curve with MR twice as steep

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5
Q

What is supply for a monopoly?

A

Equilibrium position changes as demand changes, therefore there is no supply curve but rather a supply decision

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6
Q

What is true of a monopolies profit?

A
  • +π can persist because of barrier to entry
  • π not guaranteed though
  • Monopolist doens’t operate at minimum efficient scale (minATC)
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7
Q

What is wrong with a monopoly?

A
  • Produce too little

* Higher prices than perf comp: redistribution of wealth

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8
Q

How can a monopoly lead to a redistribution of wealth?

A
  • Redistribution of wealth relative to perf comp

- Consumer surplus is transferred to monopoly profits

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9
Q

What is the size of market power?

A

Ability of the firm to set P > MC

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10
Q

What does the degree of market power depend on and what does this imply?

A
  • Depends on demand curve shape
    • Elastic: limited market power
    • Inelastic: more market power
      • MC = MR( = p(1 + 1/E))
    • P/MC = (1/(1-(1/|e|)))
    • No other factors involved in degree of market power
    • Implies that there are some monopolies with very little market power
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11
Q

What is the Lerner Index?

A
  • (P-MC)/P
  • (P-MC): Markup
  • (P-MC)/P = 1/|e|
    • Therefore, 0 ≤L.I. ≤ 1
    • 0: no power
    • 1: complete power
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12
Q

What is first degree price discrimination and what are the results?

A
  • Each individual consumer pays their own maximum willingness to pay
  • Ends up producing the efficient level of output: productively efficient
  • CS: 0
  • IF AC=MC LONG RUN NO FC then CBQe0 is their costs
  • PS: ABC = π if no FC
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13
Q

What is second degree price discrimination and what is required of it?

A
  • May be able to seperate consumers into 2 or more groups - charge each group a different amount: geography, age etc
  • Requires limits on arbitrage
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14
Q

What is third degree price discrimination?

A
  • aka non-linear pricing
  • Allows consumers to self select themselves into different groups
  • Seeing different amounts of a good for different prices (changing average per unit cost)
  • Version 1: Two Part Pricing
  • Version 2: Quantity Discount LECTURE 29 NOTES
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15
Q

What is two part pricing and it’s consequences?

A
  • Entry fee + per unit price

- DWL disappears

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16
Q

What defines natural monopolies?

A
  • Decreasing average costs over high quantities of output

- Not efficient to increase the number of firms - can’t increase competition, must regulate price

17
Q

Broadly how can a natural monopoly be regulated?

A
  • Price Regulation

* Rate of Return Regulation

18
Q

What options are there for price regulation of a natural monopoly?

A
  • MC Pricing
  • ATC Pricing
  • Two Tier Pricing System
19
Q

What is MC pricing?

A
  • P = MC is thought to be the best way to get the efficient level of output (Q*) and no DWL
  • If regulated so that Pr = MC, monopoly will take PR (where MC=MB(D)), set = MC and produce Qr
  • ATC > Pr, Loss incurred
  • To maintain viability of production, monopoly will have to be subsidised
20
Q

What is ATC pricing?

A
  • Firm produces where MB(D) = ATC

- 0π, some DWL, higher quantity produced than Qm but lower than under MC pricing

21
Q

What is a two tier pricing system in regards to regulating monopolies?

A

Monopoly price profits to subsidise MC pricing

22
Q

What is rate of return regulation?

A
  • Allow monopolies to recoup the opportunity cost of their capital investments
  • Can change a price > MC and allows them to earn a ‘fair’ rate of return on investment
  • Gives an incentive to overcapitalise
23
Q

What is the Lerner/Elasticity Relationship?

A

(P-MC)/P = 1/|e|

ECON2101 (11 decks)

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