monopolies in economics

monopoly

1 firm that produces a unique product with no close substitutes

- barriers to entry

- price maker (market power)

5 barriers to entry

1. legal/government

2. control of essential resources/inputs

3. economies of scale

4. high start-up costs

5. technological superiority

legal/pure monopoly

laws prohibit (or severely limit) competition

natural monopoly

barriers to entry are something other than legal prohibition

legal barriers

the government's attempts to prevent entry into the market by law

- patents, copyrights, and licenses

patent

exclusive rights over the production of a good

copyright

exclusive right for products developed by firms such as films or books

licenses

granted by the government to restrict the number of firms in an industry

control of necessary inputs

firms are able to own or control the necessary inputs or resources, and as a result can control the market

economies of scale

the long run AC curve continues to decline in the relative region of demand

- if another firm were to enter they would operate on a smaller scale with higher AC

natural monopoly costs

high FC so that in the long-run the AC curve may fall continuously as output increases

- MC is less than AC; which helps drive down AC as output increases

high start-up costs

the expenses that a new business must pay before the first product reaches the customer

technological superiority

some markets require a high degree of technological know-how to function

-ie: software & pharmaceutical companies

single price monopolist

offers its product to all consumers at the same price

- means that MR falls at 2x the rate of the demand curve

- MR curve will always be below the demand

single price monopolist demand curve is:

downward sloping

since demand curve reflects price MR curve is:

no longer equal to price, instead it is:

change in total revenue/change in quantity

price is greater than?

marginal revenue

how do monopolists maximize profit?

they will expand output until marginal revenue (MR) equals marginal cost (MC)

-monopolists are price searchers and have imperfect information regarding market demand. they must experiment with different prices to find the one that maximizes profit

quantity effect

one more unit is sold, increasing TR by the price at which the unit is sold

price effect

to sell the last unit, the monopolist must cut the market price on all units sold; this decreases total revenue

steps for monopoly profit maximization:

1. choose a quantity where MR = MC

2. choose a price (highest one possible) - follow the demand curve which shows how much consumers will pay for what price of the quantity you picked

how to find monopoly price:

look for the point where the MR curve crosses the MC curve

how is price obtained?

based upon what consumers are willing to pay for that quantity level which is determined by the DC

- profit max: MR = MC

monopolist total cost equation:

ATC(Quantity)

monopolist profit equation:

total revenue - total cost

monopoly vs perfect competition

monopolies have:

- market power

- produce less

- can charge high prices

- profit in the SR and LR

price discrimination

the business practice of selling the same good at different prices to different customers

- based on who is willing to pay more

when does price discrimination not apply?

- during seller's personal bias

- when products are differentiated

- when firms charge different prices for different units

necessary conditions for price discrimination:

1. the firm is able to identify different market segments

2. different segments have different price elasticities

3. markets are kept separate through time, physical distance, or nature of use

4.no seepage (resell opportunity) between markets

5. firm has market power

first-degree/perfect price discrimination

the producer of the product is able to charge each customer his or her unique willingness to pay and thus captures all value from transactions

second-degree price discrimination

practice of charging different prices per unit for different quantities of the same good or service

third-degree price discrimination

charging different prices to different demographic market segments

common price discrimination techniques:

- necessities: go on sale rarely

- outlets: lower prices but further away

- airline tickets: often cheaper to fly long distances than shorter ones