Monopoly - Market Power and Profit Maximisation Flashcards
What is a monopoly?
A market with a single firm that has market power and faces a downward-sloping demand curve
What condition defines profit maximisation in monopoly?
MR = MC
MR = marginal revenue
MC = marginal cost
Why is MR<P under a monopoly?
This is because the monopolist must lower price to sell additional units, which reduces revenue from previous units
What is price discrimination?
Charging different prices to different consumers for the same good, not base on cost differences.
What are the 3 conditions required for price discrimination?
- Market power
- Market segmentation
- No resale between consumers
What is first-degree price discrimination?
When a firm charges each consumer their maximum willingness to pay, capturing all consumer surplus.
Is first-degree price discrimination efficient?
Yes, because output occurs where P = MC, like in perfect competition.
What is second-degree price discrimination?
When the firm cannot identify individuals but offers pricing bundles where consumers self-select based on quantity.
What is third-degree price discrimination?
When the firm divides consumers into groups and charges each a different price based on elasticity of demand.
According to the elasticity formula, who pays more in third-degree PD?
The group with less elastic demand (lower π) pays the higher price.
What is the formula for price in third-degree price discrimination with constant marginal cost?
pi = MC/1-(1/ei)
Give an example of each type of price discrimination.
First-degree: Auction bidding
Second-degree: Bulk discounts
Third-degree: Student vs adult pricing
Why is MR < P under monopoly?
Because a monopolist must lower price for all units to sell one more, reducing marginal revenue.
How does a monopolist choose price and quantity?
Chooses Q where MR = MC, then uses the demand curve to set P
What causes deadweight loss in monopoly?
Output is lower and price is higher than in perfect competition β not all mutually beneficial trades occur
What is an example of 1st degree price discrimination?
A car dealership because each of the customers negotiates with the salesman
What is an example of 2nd degree price discrimination?
Airline tickets - first class, business, economy
What is an example of 3rd degree price discrimination?
Train tickets (peak vs off-peak) Commuters pay more;
off-peak travellers have more elastic demand
Why do natural monopolies occur?
Economies of scale β one firm can serve the market at lower average cost than multiple firms.
Why canβt we set P=MC for natural monopolies?
hat might result in losses if P<AC
Whatβs the regulatory compromise?
Set P=AC β ensures zero profit but avoids major inefficiency.
