Test 2: Chapters 10 & 11 (Characteristics and Dynamics of Pure Competition & Monopoly)

What are the characteristics of pure monopoly?

(a) Single seller: sole producer of a product or service, (b) No close substitutes: offers a unique product, (c) Price maker: controls total quantity supplied and price, (d) Blocked entry: significant barriers prevent competitors, (e) Nonprice competition: offers standardized or differentiated products.

What are examples of pure monopolies or near monopolies?

Gas companies, electric companies, cable TV companies, Intel (81% market for microprocessors), and Android (87% of cell phones).

What are the characteristics of pure monopoly?

(a) Single seller: sole producer of a product or service, (b) No close substitutes: offers a unique product, (c) Price maker: controls total quantity supplied and price, (d) Blocked entry: significant barriers prevent competitors, (e) Nonprice competition: offers standardized or differentiated products.

What are examples of pure monopolies or near monopolies?

Gas companies, electric companies, cable TV companies, Intel (81% market for microprocessors), and Android (87% of cell phones).

What are barriers to entry in economics?

Factors that artificially prevent firms from entering an industry.

What is economies of scale?

Declining average total cost with increased firm size, making it difficult for new firms to compete.

What is a natural monopoly?

An industry where economies of scale are so significant that a single firm can produce at a lower average total cost than multiple firms.

What are network effects?

Increases in the value of a product to each user as the total number of users rises, making it hard for startups to compete.

How do legal barriers function as barriers to entry?

Government awards patents and licenses, granting exclusive rights to produce or license products, thus preventing competition.

What is the duration of patent protection?

Patents grant exclusive rights for twenty years.

How can ownership of essential resources create a barrier to entry?

A monopolist can control resources that are crucial for production, preventing rivals from entering the market.

What is an example of a company that controlled essential resources?

International Nickel Co. of Canada controlled about 90% of the world's nickel reserves.

What are pricing or strategic barriers to entry?

Monopolists may reduce prices or increase advertising to deter new entrants.

What is the role of patents in creating monopolies?

Patents allow inventors exclusive rights to produce or license a product, leading to potential monopoly profits.

What industries often require licenses as a barrier to entry?

Radio and TV stations, taxi companies.

What is the impact of a monopolist slashing prices on new entrants?

It creates an entry barrier that makes it difficult for new firms to compete.

What is the significance of a single seller in a monopoly?

The single seller is the only producer, giving them control over the market.

What does it mean for a monopolist to be a price maker?

The monopolist has control over the price due to their control of total quantity supplied.

Why are pure monopolies considered rare?

Due to the presence of barriers to entry and competition in most markets.

What types of products might a monopolist offer?

Standardized products (like natural gas) or differentiated products (like Windows or iOS).

What is the relationship between market demand and long-run average total cost in a natural monopoly?

The market demand curve intersects the long-run ATC curve at points where average total costs are declining.

How do economies of scale protect monopolists?

They allow monopolists to produce at lower costs, making it unfeasible for new firms to enter the market.

What is the effect of network effects on competition?

They create a significant advantage for established firms, making it hard for new entrants to attract users.

What is a common feature of industries with significant barriers to entry?

They often have a single dominant firm due to the high costs and challenges of entering the market.

What was American Express found guilty of in 2015?

An unlawful restraint of trade for prohibiting rival credit cards like Visa and MasterCard.

How does the demand curve for a pure monopolist differ from that of a pure competitor?

The monopolist's demand curve is the market demand curve and is downward sloping, unlike the perfectly elastic demand faced by pure competitors.

What are the three important implications of the downward slope of a monopolist's demand curve?

1) Marginal revenue is less than price, 2) The monopolist is a price maker, 3) The monopolist sets price in the elastic region of demand.

Why is marginal revenue less than price for a pure monopolist?

Because the monopolist must lower the price to sell additional units, affecting all units produced, which results in marginal revenue being less than price.

What does it mean that a pure monopolist is a price maker?

It means that the monopolist can influence the price of the good by changing the quantity produced, as they face a downward sloping demand curve.

Why wouldn't a pure monopolist produce in the inelastic region of the demand curve?

It would reduce total revenue and increase costs, leading to negative marginal revenue.

What is the relationship between total revenue (TR) and marginal revenue (MR)?

When TR is increasing, MR is positive but declining; when TR is at a maximum, MR is zero; when TR is declining, MR is negative.

How does a pure monopolist maximize profit?

By setting marginal revenue (MR) equal to marginal cost (MC).

Does a monopolist have a supply curve?

No, there is no supply curve for the monopolist because there is no unique relationship between price and quantity supplied.

Can a pure monopolist earn positive economic profits in the long run?

Yes, due to barriers to entry, but it does not guarantee positive economic profits as changes in demand and costs can lead to losses.

What happens to a monopolist's profits if demand is weak and costs are high?

The monopolist may be unable to make a profit.

What is the significance of the downward sloping demand curve for a monopolist?

It indicates that the monopolist can set prices and that marginal revenue is affected by price changes.

What does it mean for a monopolist to set price in the elastic region of demand?

It means that the monopolist can increase total revenue by lowering prices, as demand is responsive to price changes.

What is the implication of marginal revenue becoming negative for a monopolist?

It indicates that total revenue is declining, suggesting that the monopolist should reduce output.

Why is the monopolist interested in total profit rather than per unit profit?

Because maximizing total profit is more beneficial than focusing solely on the profit made per unit sold.

What factors can affect a monopolist's ability to maintain profits?

Changes in demand and costs can impact a monopolist's profitability.

What is the profit-maximization rule followed by a monopolist?

Marginal revenue (MR) = marginal cost (MC).

What does the lack of a supply curve for a monopolist imply about their pricing strategy?

It implies that pricing is not determined solely by quantity supplied but also by the demand curve they face.

What is the effect of price cuts on marginal revenue for a monopolist?

Affects all units sold, leading to marginal revenue being less than the price of the last unit sold.

How does a monopolist's control over output affect market prices?

The monopolist can influence the market price, making them a price maker.

What does it mean for a monopolist to avoid the inelastic range of demand?

It means they aim to maximize revenue by staying within the elastic range where total revenue increases with price decreases.

What are barriers to entry in the context of monopolies?

Obstacles that prevent new competitors from easily entering the market, allowing monopolists to maintain profits.

How does the price charged by a pure monopolist compare to that of a purely competitive industry?

A pure monopolist charges a higher price compared to a purely competitive industry.

How does the output produced by a pure monopolist compare to that of a purely competitive industry?

A pure monopolist produces a lower output compared to a purely competitive industry.

Does a pure monopolist achieve allocative efficiency?

No, a pure monopolist achieves neither allocative nor productive efficiency.

What conditions must be met for allocative efficiency?

Requires that price (P) equals marginal cost (MC).

What conditions must be met for productive efficiency?

Requires that price (P) equals the minimum average total cost (ATC).

How does a monopolist's pricing relate to marginal cost?

With a pure monopolist, price (P) is greater than marginal cost (MC), leading to underallocation of resources.

What is the impact of monopoly power on income distribution?

Results in more unequal income distribution, transferring income from consumers to higher-income business owners.

What are the cost complications for a pure monopolist?

A monopolist may charge a higher price, produce a smaller output, and allocate resources less efficiently than a competitive industry due to entry barriers.

What are the four reasons costs may differ between monopolistic and competitive producers?

1. Economies of scale 2. X-inefficiency 3. Rent-seeking expenditures 4. Technological advance.

What are economies of scale?

Occurs when a firm experiences lower average total costs (ATC) due to large-scale production, leading to fewer firms in an industry.

How can economies of scale create monopoly power?

Can result from spreading large capital costs over many units or from greater specialization of inputs, leading to fewer firms.

What is X-inefficiency?

Occurs when a firm produces at higher costs than necessary, failing to achieve minimum average total costs.

Why might monopolistic firms exhibit X-inefficiency?

Monopolistic firms may lack competitive pressure to minimize costs, leading to higher production costs.

What is rent-seeking behavior?

Involves using political influence to obtain payments above the minimum required to provide a good or service, incurring inefficient costs.

Why do some economists believe monopolists are not technologically progressive?

Despite having resources for research and development, monopolists have little incentive to innovate or introduce new products.

What is the relationship between monopoly and productive efficiency?

A monopolist does not produce at the point where price equals minimum average total cost, thus failing to achieve productive efficiency.

What happens to resource allocation under monopoly compared to competition?

Resources are underallocated under monopoly due to higher prices and lower output.

What is the effect of monopoly on consumer welfare?

Monopolies typically reduce consumer welfare by charging higher prices and providing lower output.

How does the presence of entry barriers affect monopolistic industries?

Prevent new competitors from entering the market, allowing monopolists to maintain higher prices and lower output.

What role does political influence play in rent-seeking behavior?

Used to secure payments that exceed the minimum acceptable amount for providing goods or services.

What is the significance of technological advance in relation to monopolies?

Can be stifled in monopolies due to lack of competition and incentive to innovate.

How do economies of scale relate to natural monopolies?

They arise when economies of scale allow one firm to supply the entire market at a lower cost than multiple firms.

What is price discrimination?

The practice of selling a specific product at more than one price when the price differences are not justified by cost differences.

What conditions must be met for price discrimination to occur?

1. The seller must be a monopolist. 2. The seller must be able to segregate buyers into distinct classes. 3. The original purchaser cannot resell the product or service.

What are the three forms of price discrimination?

1. Charging each customer the maximum price they are willing to pay. 2. Charging one price for the first set of units purchased and a lower price for subsequent units. 3. Charging different prices to different customers.

How does a monopolist maximize profits through price discrimination based on demand elasticity?

By charging a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

Give an example of price discrimination in the airline industry.

Airlines charge business travelers higher prices due to their relatively inelastic demand.

Why do movie theaters charge higher prices for evening shows compared to matinees?

Evening show attendees are less price sensitive, viewing it as a special event, while matinee attendees are more price sensitive.

What is the price difference strategy used by movie theaters for adults and children?

Movie theaters charge adults a higher price than children, even though the cost to show a movie is the same, to increase revenue.

How do coupon users exemplify price sensitivity?

Those who take the time to manage coupons are more price sensitive, while those who do not are willing to pay regular prices.

How does international trade illustrate price discrimination?

A foreign firm may sell at a lower price in the U.S. due to many substitutes available, while selling at a higher price in its home country where substitutes are fewer.

What is the dilemma for regulators in a regulated monopoly?

Whether to choose a socially optimal price (P = MC) or a fair-return price (P = ATC).

What efficiency does the socially optimal price achieve?

Allocative efficiency, where P = MC.

What is the problem with the socially optimal price?

It may entail losses for the monopoly, requiring subsidies to prevent bankruptcy.

What is the issue with the fair-return price?

It does not achieve allocative efficiency but ensures a fair return (normal profit) for the firm.

What does P = MC signify in terms of pricing?

It signifies the socially optimal price that produces allocatively efficient output.

What does P = ATC signify in terms of pricing?

It signifies a fair-return price that ensures normal profit for the firm.

Why might a government intervene in a monopoly situation?

To mitigate adverse effects on the economy, especially when the monopoly is a natural monopoly.

What is the role of government subsidies in relation to monopolies?

To support monopolies that incur losses at the socially optimal price to prevent bankruptcy.

What is an example of price discrimination based on customer segments?

Charging different prices to business travelers versus leisure travelers.

How does demand elasticity affect pricing strategies in monopolistic markets?

Monopolists adjust prices based on the elasticity of demand in different market segments.

What is the impact of price discrimination on consumer welfare?

It can lead to increased revenue for firms but may also result in higher prices for some consumers.

What is the significance of understanding price discrimination in economics?

It helps analyze market power, consumer behavior, and the implications of monopolistic practices.

How do businesses identify price-sensitive customers?

By observing purchasing behaviors, such as coupon usage and responses to price changes.

What factors influence a firm's ability to implement price discrimination?

Market structure, consumer characteristics, and the ability to prevent resale.

What are the four market models?

(a) pure competition, (b) monopolistic competition, (c) oligopoly, and (d) pure monopoly

What are the characteristics of pure competition?

(a) a very large number of sellers acting independently, (b) a standardized product, (c) price takers with no control over price, and (d) free entry and exit with no barriers.

What defines monopolistic competition?

Characterized by a relatively large number of sellers producing differentiated products, with easy entry and exit, and some control over selling price.

What is the main characteristic of an oligopoly?

Involves only a few sellers of a standardized or differentiated product, where each firm must consider its rivals' decisions in determining price and output.

What is pure monopoly?

A market structure where one firm is the sole seller of a product or service, producing a unique product and having control over its price.

Why is the demand curve for a purely competitive firm perfectly elastic?

Because the firm has no control over the price; it can sell any quantity at the market price.

How is total revenue (TR) calculated?

= Price × Units of output.

What is marginal revenue (MR)?

The additional revenue received from producing one more unit of output.

What is the relationship between product price (P) and marginal revenue (MR) in a purely competitive market?

In a purely competitive market, the product price (P) is constant and equals marginal revenue (MR), as the firm's demand curve is horizontal.

How is average revenue (AR) calculated?

= Total Revenue / Quantity.

What is the significance of the break-even point for a firm?

Point where total revenue equals total cost, meaning the firm is not making a profit or a loss.