Krugman 13 - "Monopoly" (FIN) [70]

Monopolist

A firm that is the sole producer of a good with no close substitutes

Monopoly

A market structure in which a single firm supplies the entire market output of a good or service

Market Power

The ability of a firm to raise price above marginal cost by restricting output, allowing sustained economic profits

Barrier to Entry

Any legal, technological, or structural obstacle that prevents new firms from entering a market even when profits are positive

Control of a Physical Resource

A barrier to entry where a firm owns or controls a scarce essential input (e.g., a mineral deposit or water source)

Technological Superiority

A barrier to entry where a firm’s production method or product quality is significantly more efficient or advanced than rivals

Government-Created Barrier

A legal restriction (such as patents, licenses, or quotas) that limits or prevents competition

Natural Monopoly

A market in which one firm can supply the entire market at a lower average cost than multiple firms due to large economies of scale

Legal Monopoly

A monopoly protected by law that restricts or prohibits competition (e.g., through licensing or intellectual property rights)

Intellectual Property

Legal rights protecting creations of the mind, including patents, copyrights, trademarks, and trade secrets

Patent

An exclusive legal right granted for a limited time to produce and sell an invention

Copyright

Legal protection for original creative works such as books, music, and films

Trademark

A legally protected symbol, name, or brand identifier used to distinguish a firm’s products

Trade Secrets

Confidential production methods or formulas that provide a firm with a competitive advantage

Network Externality

A situation where the value of a product increases as more people use it, creating a barrier to entry

Predatory Pricing

A strategy of temporarily setting prices very low to drive competitors out of the market

Market Share

The fraction of total industry output produced by a single firm

Standardized Product (Commodity)

A good that consumers perceive as identical across producers

Free Entry and Exit

The ability of firms to enter or leave a market without significant legal or structural barriers

Perceived Demand Curve (Monopoly)

The monopolist’s demand curve, which is the entire market demand curve and is downward sloping

Single-Price Monopolist

A monopolist that charges all consumers the same price for each unit sold

Quantity Effect (Monopoly)

The increase in revenue from selling one more unit at the market price

Price Effect (Monopoly)

The reduction in revenue from lowering the price on all previous units when selling an additional unit

Marginal Revenue (Monopoly)

The change in total revenue from selling one additional unit, where MR < P due to the price effect

Marginal Revenue Curve

A curve lying below demand for a monopolist, showing MR falling faster than price as output increases

Slope of Total Revenue Curve

The marginal revenue

Profit

Total revenue minus total cost (Profit = TR − TC)

Total Revenue

Price multiplied by quantity sold (TR = P × Q)

Total Cost

The sum of all explicit and implicit costs of production

Marginal Profit

The additional profit from producing one more unit, equal to MR − MC

Optimal Output Rule (Monopoly)

Profit is maximized where marginal revenue equals marginal cost (MR = MC)

Profit-Maximizing Price

The price found by locating the profit-maximizing quantity and moving up to the demand curve

Monopoly Profit Calculation

(P − ATC) × Q

Per-unit Profit

Profit per unit sold, equal to P − ATC

Monopoly Inefficiency

The loss of total surplus caused by reduced output and higher prices compared to perfect competition

Allocative Inefficiency (Monopoly)

Occurs when P > MC, meaning too little output is produced from society’s perspective

Productive Inefficiency (Monopoly)

Occurs when output is not produced at the minimum point of ATC

Deadweight Loss (Monopoly)

The lost total surplus from mutually beneficial trades that do not occur due to monopoly pricing

Total Surplus Reduction (Monopoly)

The reduction in combined consumer and producer surplus relative to competitive equilibrium

Price Regulation

Government rules that limit the prices a monopolist can charge

Public Ownership

Government operation of a monopoly to control prices and output directly

Average Cost Pricing

Regulation setting P = ATC, allowing the firm to break even (zero economic profit)

Marginal Cost Pricing

Regulation setting P = MC, which maximizes efficiency but may require subsidies in natural monopoly cases

Price Discrimination

Charging different prices to different consumers based on willingness to pay

Perfect Price Discrimination

Charging each consumer their maximum willingness to pay, eliminating deadweight loss and capturing all surplus as profit

Advance Purchase Restrictions

A pricing strategy where early buyers pay lower prices than late buyers

Volume Discounts

Lower per-unit prices for larger quantities purchased

Two-Part Tariff

A pricing system with a fixed fee plus a per-unit charge

Sales and Factory Outlets

A price discrimination method where convenience-based customers pay higher prices than bargain-seeking customers

Antitrust Policy

Laws and government actions designed to prevent or reduce monopoly power and promote competition

Deregulation

The removal of government restrictions on industry entry, pricing, or production

Regulatory Capture

A situation where regulators act in the interest of the industry they regulate rather than the public

Concentration Ratio

A measure of market power based on the combined market shares of the largest firms in an industry

Herfindahl–Hirschman Index (HHI)

A concentration measure calculated as the sum of squared market shares of all firms in an industry

Marginal Profit Rule

Profit maximization occurs where MR − MC = 0 (equivalently MR = MC)

Monopoly Supply Curve Absence

The principle that monopolists do not have a supply curve because they choose output based on MR = MC rather than taking price as given

MR and Elasticity Relationship

MR is positive when demand is elastic (|ε| > 1) and negative when demand is inelastic (|ε| < 1)

Elastic Demand and Monopoly Behavior

When demand is elastic, small price increases cause large quantity drops, limiting monopoly pricing power

Finding Monopoly Price (Pitfall)

The mistake of equating MR = MC as the price

Market Power Source

The ability to raise price above competitive levels by restricting output

Substitutability (Monopoly Test)

The degree to which consumers can switch to alternative goods, limiting monopoly power

Broad vs Narrow Market Definition

The issue that defining markets too narrowly can falsely suggest monopoly power

Price Ceiling (Monopoly Benefit)

A binding price ceiling on a monopolist can increase output and total surplus without necessarily causing shortages

Public Ownership Pitfalls

Government-run monopolies may be less efficient due to weak profit incentives

Quiet Life (Hicks)

The tendency for monopolists to become inefficient due to lack of competitive pressure

Market Failure

A situation where markets fail to achieve efficient outcomes due to monopoly power or other distortions

Economic Signal

Information conveyed by prices that helps coordinate decisions of consumers and firms

Property Rights

Legal rights allowing ownership and control of resources

Single Buyer (Monopsony)

A market structure in which there is only one buyer of a good or input