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What are the four primary characteristics of a pure monopoly?

1. Only one producer of the good.
   2. No close substitutes (unique product).
   3. The firm is a price maker (significant control over price).
   4. Strong entry barriers prevent new firms from entering.

Why is a pure monopolist considered a price maker?

Since the firm is the entire industry, it has a great deal of control over the price charged for its good, rather than having to accept a market price.

What is the role of non-price competition in a pure monopoly?

There is very little non-price competition because there are no rival firms, but a monopolist may still use advertising to increase demand for the good.

What are some real-world examples of near-monopolies?

1. Public Utilities (gas, electric, cable TV).
   2. Intel (enjoys nearly 80% of the microprocessor market).
   3. Android (installed on 87% of the world's cell phones).
   4. Professional sports teams in specific geographical areas.

How do economies of scale act as a barrier to entry for monopolies?

This occurs when lowest unit costs depend on the existence of a single large firm. New firms cannot afford to start up because they cannot match the efficiency and low unit prices of the established large firm.

What is a natural monopoly?

An extreme case of economies of scale where one firm is most efficient in satisfying the entire market demand, often seen in public utilities.

What legal barriers can create and sustain a monopoly?

1. Patents: Grant inventors exclusive rights for 20 years.
   2. Licenses: Government-granted rights where only one or a few firms (e.g., radio/TV stations, taxi companies) are allowed to offer a service.

How can ownership of essential resources create a monopoly?

If one firm controls the majority of a necessary resource (e.g., International Nickel Co. controlling 90% of nickel reserves or sports leagues controlling stadium leases), other firms cannot enter the market.

What strategic barriers might a monopolist use to block entry?

Monopolists may use selective price-cutting or advertising to maintain dominance. (e.g., Dentsply preventing distributors from carrying competing brands).

What is the relationship between the monopolist's demand curve and the market demand curve?

Because the pure monopolist is the industry, the firm's demand curve is the market demand curve, and it is downward sloping.

Why is marginal revenue (MR) less than price (P) for a monopolist?

To sell an additional unit, the monopolist must lower the price of all units sold, not just the last one. The MR of the last unit is the price of that unit minus the sum of price cuts on all previous units.

What are the three assumptions made in the basic analysis of monopoly demand?

1. The monopoly is secured by patents, economies of scale, or resource ownership.
   2. The firm is not regulated by government.
   3. The firm is a single-price monopolist (charges the same price for all units).

If a monopolist lowers its price from ( \$142 ) to ( \$132 ) to sell a 4th unit, why is the marginal revenue ( \$102 )?

The gain from the 4th unit is ( \$132 ). However, the firm loses ( \$10 ) on each of the first 3 units (( 3 \times \$10 = \$30 )). Thus, ( MR = \$132 - \$30 = \$102 ).

In which region of the demand curve will a monopolist always set its price?

The elastic region. They avoid the inelastic range because setting price there would reduce total revenue and increase costs.

What is the relationship between Total Revenue (TR) and Marginal Revenue (MR) for a monopolist?

1. When TR is increasing, MR is positive (elastic region).
   2. When TR is at its maximum, MR is zero.
   3. When TR is declining, MR is negative (inelastic region).

Why is there no supply curve for a monopolist?

There is no unique relationship between price and quantity supplied; the quantity supplied depends on both marginal cost and the shape/position of the demand curve.

At what point does a pure monopolist maximize profit?

Where marginal revenue equals marginal cost (( MR = MC )).

How is the profit-maximizing price (( P_m )) determined on a monopoly graph?

Once the profit-maximizing output (( Qm )) is found where ( MR = MC ), the price is found by moving vertically from ( Qm ) up to the demand curve.

How is total economic profit calculated and represented for a monopolist?

It is calculated as ( \text{Quantity} \times (\text{Price} - \text{Average Total Cost}) ) or ( Qm \times (Pm - A) ). On a graph, it is the rectangle between the Price and ATC at the profit-maximizing output.

What is the socially optimal price for a regulated natural monopoly?

It is where Price equals Marginal Cost (( P = MC )). This results in efficient resource allocation but may cause the firm to suffer losses.

What is a fair-return price for a regulated monopoly?

It is where Price equals Average Total Cost (( P = ATC )). This allows the firm to break even (earn normal profit) but does not achieve full allocative efficiency.

What is price discrimination?

Charging different prices to different buyers when those price differences are not justified by differences in production costs.

What are the three conditions necessary for successful price discrimination?

1. Pricing Power: The firm must be a price maker.
   2. Market Segregation: The firm must be able to identify and separate buyers based on their willingness to pay.
   3. No Resale: Low-price buyers must be prevented from reselling to high-price buyers.

Why do business travelers often pay higher airline and hotel rates than leisure travelers?

Business travelers have relatively inelastic demand because they have less time to shop around and often have their expenses paid by their firm, making them less price-sensitive.

How do movie theaters practice price discrimination?

They charge higher prices for evening shows than matinees (matinee goers are more price-sensitive) and higher prices for adults than children, despite the cost of the show being the same.

How does a price-discriminating monopolist maximize profit across different market segments?

By producing where ( MR = MC ) in each segment. They charge a higher price to the segment with inelastic demand (e.g., small businesses) and a lower price to the segment with elastic demand (e.g., students).

What are the characteristics of monopolistic competition?

1. Many firms (dozens, not hundreds).
   2. Differentiated products.
   3. Some ability to set prices.
   4. No barriers to entry or exit.

What is the primary form of strategic behavior in monopolistic competition?

Advertising, used to convince consumers that a firm's differentiated product is superior to its rivals' products.

How does a firm in monopolistic competition find its profit-maximizing output and price in the short run?

Output (( Q^* )) is found where ( MR = MC ). Price (( P^* )) is found by going vertically to the demand curve. Profit exists if ( P^* > ATC ).

What happens in the long run in monopolistic competition if firms are making profits?

1. Short-run profits attract entry.
   2. Demand and MR for existing firms shift left.
   3. Prices and economic profits fall.
   4. Entry stops when firms earn normal profits (( P^* = ATC )).

In the long-run equilibrium of monopolistic competition, where is the demand curve relative to the ATC curve?

The downward-sloping demand curve is just tangent to the U-shaped ATC curve at the output ( Q^* ) where ( MR = MC ).

What is excess capacity in monopolistic competition?

The difference between the output that minimizes ATC and the (smaller) output produced by the firm. Firms do not produce at the lowest possible cost.

How does deadweight loss (DWL) in monopolistic competition compare to pure monopoly?

DWL exists in monopolistic competition because ( P > MC ), but the degree of DWL is smaller than in a monopoly because there is more competition.

What is meant by the "price of variety" in the context of monopolistic competition?

Although inefficient compared to perfect competition, the differentiation (variety) provided by monopolistic competition is often preferred by consumers (e.g., different restaurant menus).

What is the Sherman Antitrust Act of 1890?

A key piece of legislation in the U.S. that makes explicit cartel collusion illegal and aims to prevent monopolies or oligopolies from acting like monopolies.

What is tacit collusion in an oligopoly?

When firms cooperate to keep prices high without an explicit agreement.

What factors make tacit collusion less likely to succeed?

1. Large Numbers of firms (harder to monitor).
   2. Complex products and pricing schemes.
   3. Differences in Interest (diverse firm characteristics).
   4. Significant Bargaining Power of Buyers (e.g., large retail chains).

Define a price leader in an oligopoly.

A firm that sets a price, and its rival firms follow that price, creating a tacit agreement.

What are some examples of non-price competition in oligopolies?

1. Offering warranties or better service.
   2. Longer operating hours.
   3. Rewards programs/store credit cards.
   4. Amenities (e.g., cafes inside stores).

What is the simple definition of Game Theory?

The study of how interdependent decision makers make choices.

What is a non-cooperative game in game theory?

A game where each player competes to maximize their own payoff while ignoring the effects of their actions on their rival's payoffs.

What is a dominant strategy?

A strategy that outperforms any other strategy, regardless of what strategy the opponent selects.

What is a Nash equilibrium?

An outcome where each player is happy with the result, given the choice made by their rival, and neither has an incentive to change their strategy.

In the Prisoners' Dilemma example with two crooks, why is confession the dominant strategy?

Because no matter what Crook #2 does (Confess or stay Silent), Crook #1 receives a shorter sentence by Confessing (5 years vs 20 years, or 1 year vs 2 years).

How can firms overcome a Prisoners' Dilemma over time?

Through repeated interaction and the development of trust or tacit collusion.

What is the "tit for tat" strategy in game theory?

A strategy where a player starts by cooperating and then, in each subsequent period, does whatever their opponent did in the previous period (retaliating for cheating and forgiving if the rival returns to cooperation).

In the Super Bowl advertising example, if both Ford and GM have a dominant strategy to advertise, is it a Prisoners' Dilemma?

No, because even if they could agree, there is no other outcome that is better for both firms than the Nash equilibrium where both advertise and earn \( \$100 \).

What is allocative efficiency and why does a monopoly fail it?

It is the production of the right mix of goods where ( P = MC ). Monopolies fail this because they produce where ( P > MC ), resulting under-allocation of resources.

How long is the exclusive right granted by a patent in the United States?

Twenty years.

In international trade, why might a firm sell at a low price in a foreign market but a high price at home?

This is a form of price discrimination; there are often many substitute suppliers in the foreign market (elastic demand), but fewer substitutes in the home country (inelastic demand).

Why does market entry stop in monopolistic competition when normal profits are made?

Normal profit is just enough to keep the firm in the industry; there is no economic profit left to attract new entrepreneurs.

What is the primary difference in long-run output between perfect competition and monopolistic competition?

In perfect competition, ( P = MR = MC = ATC ) at the minimum of the ATC curve. In monopolistic competition, ( P = ATC > MR = MC ) on the downward-sloping range of the ATC curve.

What is the legal consequence of explicit cartel collusion today?

It is illegal and uncommon in modern economies like the U.S. and EU due to a series of antitrust laws.

In the gas station duopoly example, if Pam sets a low price (( PL )) and Margaret sets a high price (( PH )), how do the payoffs compare?

Pam (the low price station) earns ( \$100 ) because she drastically outsells Margaret, who only earns ( \$50 ).

What is a "rehabilitated cheater" in a tit-for-tat strategy?

A player who previously cheated (e.g., set a low price) but returns to cooperation (e.g., sets a high price), leading the other player to "forgive" them in the next period.

Why is monopolistic competition considered "monopolistic"?

Because firms have product differentiation, giving them some degree of pricing power similar to a monopolist.

Why is monopolistic competition considered "competitive"?

Because there are many firms and no barriers to entry/exit, which drives economic profits to zero in the long run.

What determines the degree of deadweight loss in an imperfectly competitive market?

The "wedge" or gap between price and marginal cost; a larger gap indicates a higher degree of inefficiency and DWL.

In game theory, what happens if there is no strong deterrent to confession in a Prisoners' Dilemma?

The players will always pursue their dominant strategy (to confess), leading to an undesirable Nash equilibrium.

Why does Google or Amazon enjoy economies of scale?

Their massive size and market share allow them to operate more efficiently and at lower unit costs than potential new competitors.

What does a declining long-run average total-cost curve over a wide range of output indicate?

It indicates extensive economies of scale, characteristic of a natural monopoly.

If a monopoly is earning economic losses in the short run, what might be the cause?

Weak demand or excessively high costs.

What is the marginal revenue when total revenue is at its maximum?

Zero.

What happens to the profit rectangle of a monopolistically competitive firm as new rivals enter the market?

The profit rectangle gets smaller as the existing firm's demand and marginal revenue curves shift to the left.

How does product differentiation affect a firm's ability to raise prices?

If consumers perceive a product as different and better than its rivals, the firm can increase the price and consumers will still be willing to pay it.

How does the number of firms in an industry relate to the success of tacit collusion?

The more firms there are, the less likely tacit collusion will be successful, as it is easier for a firm to "cheat" without being detected.

Why is international trade often characterized by price discrimination?

Firms face different competition levels in different countries, creating varying elasticities of demand that the firm can exploit.

What is the dilemma for government regulators when dealing with a natural monopoly?

Choosing between the socially optimal price (( P = MC )), which is efficient but may require subsidies, and the fair-return price (( P = ATC )), which ensures the firm survives but is less efficient.

In a Prisoners' Dilemma, can players reach a better outcome through cooperation/collusion?

Yes, they could achieve a mutually beneficial outcome (e.g., both staying silent), but the incentive to cheat for individual gain often leads them to the Nash equilibrium instead.

What happens to market demand for a firm's product in monopolistic competition when rivals exit the market?

Demand and marginal revenue for the remaining firms rise (shift to the right) because there are fewer similar products available.

What is the " Nash equilibrium outcome" of the Super Bowl advertising game for Ford and GM?

Both firms choose to Advertise and earn ( \$100 ) each.

Why do movie theaters charge children less than adults even though the cost is the same?

It is a price discrimination tactic to bring in more people and revenue; otherwise, families might not be able to afford to bring everyone, reducing the theater's total revenue.

How does price discrimination affect a firm's total profit?

A price-discriminating monopolist's total profit exceeds the profit that would have occurred if the firm charged a single price to all customers.

What is the result of entry stopping in a monopolistically competitive industry?

The industry achieves long-run equilibrium where firms earn only normal profits and have no incentive to enter or exit.

What is the dominant strategy for GM in the Super Bowl advertising matrix?

To Advertise, because GM earns more by advertising regardless of whether Ford advertises (\( \$100 \text{ vs } \$50 \)) or doesn't advertise (\( \$150 \text{ vs } \$50 \)).

How does market segregation allow for price discrimination?

It allows the firm to identify which customers have inelastic demand (willing to pay more) and which have elastic demand (willing to pay less) and charge them accordingly.

What does "mutually interdependent" mean in the context of an oligopoly?

It means the choices made by one firm directly affect the outcomes for its rival firms.

Why might a firm in monopolistic competition never produce at the minimum of its ATC curve?

Because its demand curve is downward sloping (due to product differentiation), it will always be tangent to the ATC curve on its downward-sloping portion, leading to excess capacity.

How do professional sports leagues maintain a monopoly on player contracts?

By controlling essential resources, specifically through league rules that limit how players can sign with different teams or how new teams can enter the league.