MS: Monopoly Flashcards
Imperfect Competition
When a firm differentiates a product to have some influence over the price.
Done through:
- Monopolies (extreme end)
- A Competitive Firm
Market Shares
The proportion of total sales in a market accounted by a particular firm.
Market Power
The power a firm has to raise the price of their product without losing all its sales to its rivals.
Monopoly
Caused by the presence of barriers to entry, these are caused by:
1. Ownership of a key resource
2. The government giving a single firm the exclusive right to produce a certain good. –> Monopolies rarely rise from this though.
3. Costs of production make a single producer more efficient that a lager number of producers.
4. A firm can gain control of other firms in the marker, therefore growing in size.
- MR < Price of a good
Gov created Monopolies
Patent and Copyright Laws used to create monopoly to serve public interest
Natural Monopolies
Happen when there are economies of scale which allow for average total to fall as the firm’s scale grows.
- Happen when a firm can provide a good or service to a whole market for a lesser cost than two or more firms
Monopolies Creation and Aim
- When there’s an external growth due to mergers, takeovers or acquisitions, the industry becomes more concentrated. Allows the firm to develop monopoly power and intro barriers to entry and make it harder for new firms to enter.
- Aim: Maximise economic profit: In the short-run, they chose a level of output that sets the difference between TR and TC the greatest.
Monopolies vs Competitive Firms
Monopolies can control prices, competitive firms cannot.
Monopolies:
- Sole producer
- Downward sloping demand curve
- Reduce prices to increase sales
- P > MR = MC, makes it more desirable for owners of the firm, less desirable for consumers (deadweight loss)
Competitive Firms:
- Straight horizontal demand curve
- 1 of many producers
- Sells as much or less at the same price
- No barriers to entry
- P = MR = MC
Firm’s choice in increasing quantity sold
- Cause an output effect = more output = Q increases
- Cause a price effect = Price falls = P decreases
Price Fall
TR doesn’t rise linearly with output.
- Reaches maximum at midpoint of demand curve then starts to fall
- Max reached when PED is unity
Monopoly and Social Optimum
M power to control the price causes a wedge between consumers WTP and producer’s cost, causing Q to fall off the social optimum
Welfare Cost of Monopoly
Consider consumer and producer:
- Transfer of surplus from consumer to producer is not a social loss
- Cost of a firm or monopoly trying to maintain power is considered a deadweight loss
Price Discrimination
Selling the same good at different prices to different customers despite the cost to produce being the same
- Firm must have some market power to do this
- Causes an increase in monopolist’s profit and can reduce deadweight loss
- Monopoly’s power to price discriminate is limited by ‘Arbitrage’ (the process of buying a good in one market at a low price then selling it in another market at a higher price).
Perfect Price Discrimination: Monopoly’s separate customers by their WTP and charge them at different rates
Public Policy Towards Monopolies
- Gov makes the industries more competitive: prevent mergers, takeovers etc, intro laws that prevent firms from activities that make the market less competitive
- Regulation of monopolies behaviours e.g. price
- Allows monopolies the benefit of lower costs in the form of higher profits to move firm away from marginal cost pricing - Turning private monopolies into public enterprises: running monopolies themselves over natural monopolies
- Doing nothing; only if the market failure is small in comparison to the imperfections of public policies.
