Monopoly Flashcards
Types Of Markets
perfect competition
monopolistic competition (imperfect)
oligopoly
monopoly
What causes monopolies?
A legal protection (e.g., Patents for new drugs, US Postal Service)
Sole ownership of a resource (e.g., a toll highway, de Beers)
Formation of a cartel (e.g., OPEC)
Large economies of scale (e.g., local utility companies) Natural monopoly
Describe a Pure Monopoly
A single seller
The monopolist’s demand curve is the (downward sloping) market demand curve
Monopolist can alter the market price by adjusting its output level
What is the profit-maximising output level for a monopoly?
marginal revenue = marginal cost
Marginal Revenue
Marginal revenue is the rate-of-change of revenue as the output level y increases
Marginal cost
Marginal cost is the rate-of-change of total cost as the output level y increases
Price elasticity
Price elasticity is the percent change in quantity divided by the percent change in price
Natural Monopoly
When the firm’s technology has economies-of-scale large enough for it to supply the whole market at a lower average total production cost than is possible with more than one firm in the market
Predatory pricing
A low price set by the incumbent firm when an entrant appears, causing the entrant’s economic profits to be negative and inducing its exit
Price discrimination
Practice of charging different prices to
different customers for the same product
E.g.) Student discounts, different air fares for business travelers and
tourists
What are the two key requirements for price discrimination?
Firm must have market power - Without this the firm cannot choose its price at all
The firm must prevent resale and arbitrage - Otherwise the firm will only sell to customers, to whom it charges the lowest price, who will resell at a profit to those customers whom the firm would charge a higher price (then the firm is back at uniform pricing)
Types of Price Discrimination
1st-degree: Each output unit is sold at a different price
2nd-degree: price paid by a buyer can vary with the quantity demanded by the buyer. (e.g., bulk-buying discounts)
3rd-degree price discrimination: price may differ across buyer groups. (e.g., senior citizen and student discounts vs. no discounts for middle-aged persons)
