Lesson 2.9: Pure Competition and Monopolies

Flashcards made from a presentation segment created as a lesson on pure competition and monopolies.

Pure competition

A market structure where:

• There is a large number of firms

• There is one main, same product

• There is little price control in the market

• The market is in equilibrium

Imperfect competition

A market structure that fails to meet the conditions of perfect competition

Commodity

A product that is considered the same no matter who sells it

Barrier to entry

Any factor that makes it difficult for a new form to enter a market

• Can lead to imperfect competition

• Includes start-up costs and technology

Start-up costs

The expenses a new business must pay before it can begin to produce or sell goods

• Higher amounts can make it difficult for new firms to enter the market, leading to imperfect competition

  • Can include complex or expensive technology

Perfect competition

A market where all transactions are efficient as competition keeps prices and production costs low through resource maximization and proper market valuation

Monopoly

A market in which a single seller dominates

• Can be legalized, as is the case for governments allowing drug development companies to accrue more revenue

• Has usually one firm, no variety, controlled prices, and high barriers to entry

Natural monopoly

A market that runs most efficiently when one large firm suppplies all output

• Adding more firms will drive down the price of both firms’ products, eventually leading both to an inability to pay their initial costs

• Seen with residential water companies having only one network connected to each house in an area

Government monopoly

A monopoly created or sanctioned by the government

• Patents and franchises are included in this category

Patent

A license that gives the inventor of a new product the exclusive right to sell it for a specific period of time

Franchise

A contract that gives a single firm the right to sell its goods within an exclusive market

Price discrimination

The division of consumers into groups based on how much they will pay for a good

Market power

The ability of a company to control prices and total market output

Patent

A governmentally-granted exclusive right to sell a new good or service for a particular period of time

License

A permit to operate a business, especially where scarce resources are involved

Monopolist’s Dilemma

Situation where a producer with complete control of a good has to set price and production at equilibrium

• More production will lead to lower prices and thus falling revenue

• Less production will lead to higher prices and thus lost potential revenue

Price discrimination

Practice where a monopolist may be able to divide consumers into two or more groups and charge a different price to each group for more revenue

• Requires significant market power, distinct customer groups, and difficult resellability