Spring week 5-8 Flashcards
market features of a monopoly
No. of sellers 1
entry closed
market power total
product differentiated
definition of monopoly
a single firm that supplies an entire market
how do natural monopolies occur
when there are economies of scale to production e.g average costs fall until reaching an output that represents the whole market
examples of monopolies arising
property rights
limited access to essential inputs
how is profit measured
vertical distance between total revenue and total cost curves
how is profit maximized
when marginal revenue equals marginal cost
why is monopoly inefficient
output should be increased until consumers willingness to pat is no higher than marginal cost
but monopolies marginal revue is lower than the prevailing price so to profit maximize lower output and a price mark up relative to marginal cost
disadvantages
price are high consumer surplus is low
output is lower than socially optimum so we see deadweight loss
monopolist isnt forced to cost minimize efficiently
advantages
if MC is downward sloping socially efficient is loss making so good may not be produced without monopolist
potential for supernormal profit creates incentive for firms to invest in R and D
supernormal profits allow monopolist to be risk taker which public and private sector cant do
how to eliminate DWL
give intervention to break monopoly
regulation price cap
monopolist could use price discrimination
first degree price discrimination
charging each consumer her own maximum willingness to pay, eliminating DWL but no consumer surplus
second degree price discrimination
offers a menu of pricing options e.g versioning
third degree price discimination
segmenting the market into groups of consumers e.g adults and children prices
advantages of price discrimination
reduces DWL and increases producer surplus
how is consumer surplus effected by price discrimination?
effect on consumers surplus mixed either increase, decrease or eliminate
Oligopoly market structure
few sellers
closed entry
some market power
homogeneous goods
definition of oligopoly
small number of firms with large percentage of market output
What do oligpolies do about price
use strategic interaction, there actions depend on the actions of the other firm
cournot model
oligopoly firms simultaneously decide their level of output, then market determines price
each firm makes output decision in anticipation of the others, if anticipate wrong they adjust and process will continue until equilibrium is found.
Bertrand Model
envisages that oligopolisitc firms simultaneously decide their price and the market then decides the quantity each firm sell
best response is to set its price slightly below the price of the other firm
how can firms differentiate their products
locating differnt areas
offering feautures and specification
creating brand image
collusion
practice of trying to increase profits sustaining such a cooperation notwithstanding the incentives to deviate
types of collusion
explicit agreement- cartel
long run patterns of behavior to avoid competition called tacit collusion.
info about cartels
non price competition to determine market share
quotas
illegal in most countries
info about tacit collusion
firms keep to the price set by leader
or dominant firm
or rule of thumb i.e usual markups relative to average costs
often is facilitated through exogenous signal e.g introduction of price cap everyone charge as high as possible.
