Monopoly Flashcards
market structure of a monopoly
- only 1 producer
- no close substitutes
- barriers to entry
barriers to entry in a monopoly
- can be absolute
- can be cost advantage
natural monopoly
- particular barrier to entry
- occurs when economies of scale never stop
- only room for 1 firm
- socially efficient to have one firm (ex. the T)
demand curve of a monopoly (not a natural monopoly)
-same as demand curve for the market, must obey this curve
can monopolies price discriminate?
- only if the good can’t be resold
- ex for no: grocery store charging more to men
- ex for yes: surgeon
MR for Non-discriminator (not formula)
- MP=P for first unit
- then MP falls 2x as fast as P
MR for non discriminator (formula)
MR=price-(change in price)(firms original Q)
monopoly profit maximization
- assume monopoly won’t shut down
- produce when MR>MC
- monopoly gets to set prices based on demand curve, will under supply to maximize profits
3 points about a monopoly
1) doesn’t have a supply curve
2) may have losses in short run, not in long run
3) inefficient to have a monopoly
deadweight loss of a monopoly
area lost from producing profit maximizing Q instead of socially efficient Q
public policy against monopoly
- can use antitrust laws
- can induce competition by free international trade
- natural monopoly: don’t break up the firm
a second look at natural monopoly
- exist for club goods (not all club goods are monopolies)
- large set up cost, huge return, trivial MC if 1 more unit
- MC is below AC
regulating a natural monopoly
-tried to reach Q*
-method 1) order the firm to set price=MC and sell what’s demanded (won’t work, AC>P, neg. econ profit, firm will exit)
-method 2) 2 part pricing
firm charges a service charge which makes the firm break even, lowers Q* but is overall an effective solution, problem: regulators must know MC, firm will often lie
average cost pricing
- used bc firms lie about MC
- order firms to change price=AC
- problem—> will not reach Q*
- will end at second intersection of D and AC
final issues of regulators
- must be flexible to encourage innovation
- firms must b able to profit if they cut costs
