Monopoly Flashcards
What is a monopolist?
A monopolist is the sole producer of a good or service for which there is no close substitute. There are many buyers. The monopolist therefore has complete market power.
What barriers to entry are there in the existence of a monopoly?
Economies of scale Network effects Brands Technological know how Patents Limit pricing
Economies of scale occur in…?
The case of a natural monopoly
Network effects occur when…?
The utility yielded by a unit of a firms output depends on the number of people using that firms output eg. eBay
Why are patents awarded?
To encourage innovation
Why might a monopolist set a low price?
To deter entry.
The demand curve faced by the monopolist is…?
Downward sloping.
The demand still equals…?
Average revenue.
TR= price x quantity, so AR=TR/q
Marginal revenue is…
Less than average revenue.
MR is twice…?
As steep as AR
Profit maximisation is at…?
MR=MC
With output at q* and the price at p*
q* is to the left of…?
The minimum of AC.
Is Supernormal profit earned and if so, can it be competed away?
Yes and it cannot be competed away owing to barriers of entry.
Where is q*?
To the left of the minimum of AC.
Compared to a perfectly competitive industry, does a monopolist produce more or less at a higher or lower price?
A monopolist produces less and charges a higher price.
Is a monopolist allocatively efficient?
No, because it produces where AC is above the minimum.
What type of loss is associated with monopoly?
Dead weight loss.
What is a surplus earned under monopoly or perfect competition?
Consumer surplus+supernormal profits
What is the difference between the surplus between a monopolistic firm and a perfectly competitive firm.
The deadweight/welfare loss due to monopoly.
Why do monopolies need to be regulated?
To ensure that they don’t operate against the public interest.
What is the Harberger triangle?
In the special case where AC (and so also MC) are flat, that is what the deadweight loss is given by.
What motivates regulation? Elaborate.
Welfare losses due to monopoly.
Especially natural monopoly where average costs always decline as output rises.
In terms of perfect price discrimination, does the monopolist differ from perfect competition or not?
They do not differ.
If the monopolist can perfectly price discriminate (ie charge each customer the most she is willing to pay), output will be the same as under perfect competition.
In this case of perfect price discrimination, there is no….?
Welfare loss due to monopoly.
Where does the surplus earned by society go?
All to the producers and none to the consumers.
