Pure Monopoly, Monopolistic Competition, Oligopoly Test Flashcards
What are the types of monopolies and examples of them?
- government owned monopolies: TVA power, municipal water
- regulated monopolies: gas, electric, water, cable, phone
- private unregulated monopolies: De Beers Diamond Syndicate, Pro Sports Leagues
- local monopolies: airline, bank, movie, bookstore
What are the barriers to entry for a pure monopoly?
- Economies of scale
- Public Utilities: natural monopolies
- Legal barriers: patents and licenses
- Ownership of raw materials
- Pricing and other strategic barriers
- product disparagement
- pressure on resource supplier
- aggressive price cutting
- dumping: flooding the market
What is a cooperative?
Group of individuals working together
What is an unregulated monopoly also called?
Non-discriminatory
What are the assumptions in an unregulated monopoly?
- monopoly status secured by patents, economies of scale, or resource ownership
- firm is not regulated
- the firm is a single price monopolist charging the same for all units of output
Why is the demand curve of an unregulated monopoly sloping downward?
To sell more of his goods, the monopolist must lower his price
What price does the monopolist charge?
The highest price he can
What portion of the demand curve must the monopolist operate in?
The elastic portion
Why must the monopolist operate in the elastic portion of the demand curve?
Because in the inelastic region, it must lower the price
Why is the imperfectly elastic firm’s MR curve below their demand curve?
Because monopolists must lower the prices on all units to increase sales
Where is the elastic portion of the demand graph?
Anything left of when MR=0
For an unregulated monopoly how do you find the quantity to produce?
Find MR=MC
In an unregulated monopoly’s demand curve how do you find the price?
Find the point on the demand curve that corresponds with quantity being produced
How do you find the profit/loss for an unregulated monopoly curve?
Find the ATC curve and determine whether its above or below the price
Why is there no supply curve for an unregulated monopoly?
They are the supply
A pure monopolist will
Charge a higher price and sell a lower quantity
To know that a graph is a graph of a monopoly look for
The MR curve below the demand curve
Pure monopoly
P > min ATC
P > MC
-neither allocative nor productive efficiency
X- inefficiency
-inefficiencies or poor management by firm
-ex:
• easier work life
• giving jobs to incompetent friends/ family
• risk avoidance
Rent seeking expenditures
- adds nothing to output
- increases costs
- used to maintain monopoly
In a discriminatory monopoly what three conditions are realized?
- seller must be a monopolist or at least have some degree of monopoly power (ability to control output and price)
- seller must be able to segment the market so that each has a different willingness and ability to pay for the product (based on different elasticities of demand)
- original purchaser can’t resell the product or service
Single price monopolist
Produces output where MR=MC at Q and sells that Q at P.
Perfectly Discriminating Monopolist
D=MR because it doesn’t cut price on preceding units to sell more output. The profitable output is Q2, which is greater than the single monopolist
Perfectly discriminating monopoly
Collects consumer surplus
Monopoly price, fair return price, and socially optimum price
- Monopoly price is where the monopolist wants to produce
- socially optimum price (P=MC) is where we want the monopolist to produce
- fair return price is the compromise between the two
T/F “A monopolist always charges the highest possible price?”
False, they charge the price that will yield the highest total profit (MR=MC)
How does a monopoly affect consumer surplus?
A monopoly decreases consumer surplus. Surplus is transferred from consumer to producer
What happens to consumer surplus of a firm successfully price discriminates?
Decreases
What happens to the firm’s profits of it successfully price discriminates?
Increases
What are characteristics of monopolies?
- single seller: industry and firm synonymous
- no close subs: unique product; no reasonable alternative
- price maker: firm exercises control over price
- some degree of non price competition: generally advertising
- blocked entry: barriers to entry created by monopolist or government
What is the market situation in a monopolistic competition?
A relatively large number of small producers are offering similar but not identical products
Characteristics of a monopolistic competition?
- each firm has small percentage of total market
- collusion is not likely
- no mutual interdependence
- easy entry and exit
- non price competition
What are the monopolistic qualities in a monopolistic competition?
- control over price
- D > MR
- advertising
- not efficient
What are the perfect competition qualities in a monopolistic competition?
- large number of firms
- easy exit/entry
- no long term profit for industry
What does the demand curve faced by a monopolistic competition seller look like?
Highly but not perfectly elastic
In monopolistic competition is there any profit?
No there’s just normal profit
Is monopolistic competition efficient?
No it’s neither allocative or productive efficiency since P doesn’t equal MC or P doesn’t equal ATC
What are the goals of advertising?
- to increase market share
- to create customer loyalty
In an oligopoly how many firms are there?
Relatively small number (2-4)
What are the characteristics of an oligopoly?
-few large producers (2-4)
-homogeneous or differentiated products
-control over price with some mutual interdependence
-entry barriers
•economies of scale
•the level of demand will dictate how
many firms are needed
•ownership of patents will be a
barrier
•ownership or control of raw
materials
•urge to merge for greater profit
What are the measures of industry concentration in a monopolistic competition?
-concentration ratio: percentage of total industry sales accounted for by the four largest firms in the industry
• when 4 firms control 40% or more of
the market, the industry is
considered oligopolistic
-herfindahl index: helps to show dominance of major firms
•sum of squared % market share of
all firms in the industry
•greater weight given to larger firms
•larger the index number, the greater
the market power within an industry
• 100^2 = pure monopoly
What does game theory examine?
Oligopolistic behavior as a series of strategic moves and counter moves by rival firms. Analyzes behavior of decision makers, whose choices affect one another.
What does the game theory reveal that oligopolies show?
- mutual interdependence
- expectation of reaction: match price decrease but ignore a price increase
- collusive tendencies
- unpredictability of reaction
What is the economic efficiency of an oligopoly?
Acts like a monopoly; no productive or allocative efficiency; worse than monopoly because gov discourages monopoly development
What are the obstacles to collusion?
- Demand and cost differences
- # of firms
- Cheating
- Potential entry
- Anti- trust laws
- Recession
