Monopoly Flashcards
Monopoly
A single seller of a product with no close substitutes serves the entire market
Factors that lead to a monopoly / Sources of a monopoly
- Exclusive control over important inputs
- Economies of Scale
- Patents
- Network economies
- Government licences of franchising
Natural Monopolies
Markets characterized by declining long run average cost curves
If more than one company in the market, each firm’s average cost would be higher
Profit maximization
- Max profit where MR = MC
- Never operates on the inelastic part of the demand curve
Marginal Revenue
- dTR/dQ
- P0 - (dP/dQ)*Q0
- P(1 - 1 / |E| )
Profit maximizing markup
(P-MC)/P = 1 / |E|
Measuring monopoly power
Lerner index:
L = (P - MC) / P
L = -1 / |E| between 0 & 1
Monopolist’s shutdown condition
AR < AVC at every level of output
Monopolist supply curve
Does not exist
Monopoly is a price maker and not a price taker
Price discrimination
Charging different prices to different buyers
Only feasible when it is impossible or impractical for buyers to trade among themselves (Arbitrage)
Third degree price discrimination
Charging different prices to people in completely different markets
Arbitrage
The purchase of something for costfree risk-free resale at higher price
Intertemporal price discrimination
Your market price is split into two: Initially you ask a high price, then you lower it
2 Different demand curves: one inelastic for those not willing to wait, and one elastic for those willing to wait
Peak-load pricing
Less of an effort to capture consumer surplus and more of a means of increasing efficiency
First degree price discrimination
The largest possible extent of market segmentation
Ask the reservation price
Points of comparison between the perfectly price discriminating monopolist and the monopolist who cannot discriminate at all
- The perfect discriminator has a higher level of output, because he need not be concerned with the effect of a price cut on the revenue from output produced so far
- No consumer surplus under the perfect discriminator
Second degree price discrimination
Different prices according to blocks
Price discrimination along a schedule which price declines with the quantity bought
Hurdle model of price discrimination
The seller sets up a hurdle of some sort, and makes a discount price available to those buyers who elect to jump over it
The logic is that those buyers who are most sensitive to price will be more likely than others to jump the hurdle
With a perfect hurdle, none of the people who pay the discount price has a reservation price greater than or equal to regular price, which mean all of them would have been excluded from the marker had only bee the regular price available
Allocative efficiency
P = MC
Productive efficiency
Minimum value of ATC where ATC & MC intersect
Monopoly deadweightloss
Study graph 10.21 on p 322
Public Policy Toward Natural Monopoly
- State ownership and management
- State regulation of private monopolies
- Exclusive contracts
- Vigorous enforcement of antitrust laws
- A Laissez-faire policy
X-inefficiency
A condition in which a firm fails to obtain maximum output from a given combination of inputs
Rate of return regulation
Prices are set to allow the firm to earn a predetermined rate of return on its invested capital
Gold-plated water cooler effect
The regulated monopolist has the incentive to purchase more capital equipment than is actually necessary to produce any given level of output
Cross-subsidiary effect
A monopolist who serves more than one separate market has an incentive to sell below cost in the more elastic market, and cross-subsidise the resulting losses by selling above cost in the less elastic market
Economic profit = (required rate of return - actual cost of capital) * Total capital stock
Graphs p 325
Advantages and disadvantages of monopolies
? ? ? ? ? ? ? ? ?
