Introduction to Monopolies and Oligopolies

This set of flashcards covers the key concepts, characteristics, and implications surrounding monopolies and oligopolies, including market structures, pricing strategies, and economic effects.

What is a natural monopoly?

An industry in which a single firm can produce at a lower cost than two or more firms.

What happens to marginal revenue for a monopoly firm compared to demand?

Marginal Revenue is less than Demand (MR < D).

Characteristics of a monopoly?

One large firm, unique products, high barriers to entry, price makers.

Example of a natural monopoly in electricity?

BC Hydro is an example of a natural monopoly.

Why are monopolies considered price makers?

Monopolies have control over the price they charge due to lack of substitutes.

What is the impact on costs if three electric companies were competing?

Higher costs compared to one monopoly company.

What is the relationship between MR and MC for monopolies?

Monopolists produce where Marginal Revenue equals Marginal Cost (MR = MC).

What is the shut down rule for monopolies?

A monopolist will shut down if price falls below average variable costs.

What does it mean when total revenue is maximized?

Total revenue reaches its peak when Marginal Revenue equals zero.

Define inelastic demand. What occurs with price changes?

Price increase causes total revenue to increase, price decrease causes total revenue to decrease.

Define elastic demand. What occurs with price changes?

Price increase causes total revenue to decrease, price decrease causes total revenue to increase.

What does it mean if a monopolist is inefficient?

They produce less and charge a higher price than perfect competition would.

What happens to consumer surplus in a monopoly?

Consumer surplus falls while producer surplus increases.

What is meant by deadweight loss in a monopoly context?

A loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved.

What is the break-even price for a monopolist?

Price set where the firm can cover its average total costs but not necessarily maximize profit.

Price discrimination definition?

Charging different prices to different buyers for the same product.

What are the three conditions needed for price discrimination?

Monopoly power, market segregation, and inability for consumers to resell products.

How does price affect marginal revenue in a price discriminating monopoly?

Price equals marginal revenue (P = MR).

What is the main focus of non-price competition?

To increase demand and make demand more inelastic.

Characteristics of monopolistic competition?

Large number of sellers, differentiated products, some price control, easy entry and exit.

How does a monopolistic competitor maximize profit?

By producing where Marginal Revenue equals Marginal Cost (MR = MC).

What is the result of new firms entering a market in monopolistic competition?

Demand for existing firms decreases due to increased substitutes.

What is the excess capacity in monopolistic competition?

The difference between the minimum ATC output and the profit-maximizing output.

Characteristics of oligopolies?

Few large producers, differentiated products, high barriers to entry, mutual interdependence.

Define game theory in the context of oligopolies.

The study of strategic decision making by firms, affecting pricing and output.

What is a dominant strategy?

The best move a player can make regardless of what the opponent does.

What does Nash equilibrium refer to in game theory?

An optimal outcome where no player has an incentive to change their strategy.

What is a cartel?

A group of producers that agree to fix prices high and behave as a monopoly.

What is price leadership in oligopolies?

A strategy where a dominant firm sets prices and others follow.

How do firms behave in non-colluding oligopolies?

They remain independent in pricing decisions; if one changes price, others might ignore it.

What is required for effective price discrimination?

The firm must have market power and be able to separate consumers with different demand elasticities.

What is the typical outcome for profits in the long-run in perfectly competitive markets?

Zero economic profit due to ease of entry for new firms.

What is the primary method by which monopolists can increase their profits?

By producing less and charging higher prices than would be in perfect competition.

What happens when the government places price ceilings on monopolies?

It can result in losses and may require government subsidies to keep the firm operating.

What is allocative efficiency?

Occurs when price equals marginal cost (P = MC), maximizing total welfare.

What is productive efficiency?

Occurs when firms produce at the lowest average total cost (minimum ATC).

What does it mean if a firm has inelastic demand?

Quantity demanded changes less than price changes, allowing firms to increase prices.

What are barriers to entry in oligopolies?

High costs, economies of scale, ownership of resources that prevent new firms from entering.

In the long-run, firms exit the market if…

They consistently incur losses, reducing competition and increasing demand for remaining firms.

What is the price/output behavior of a firm in oligopoly?

Interdependent pricing, where actions of one firm directly affect others.

Explain the kinked demand curve model in oligopolies.

A model showing how non-colluding firms react to price changes of competitors.

What happens to demand when firms in monopolistic competition make short-run profits?

New entrants decrease demand for existing firms.

What dictates the price range in price discriminating monopolies?

Different consumer willingness to pay leads to varied pricing.

What happens to consumer surplus when monopolies engage in price discrimination?

Consumer surplus is eliminated as the firm captures all consumer surplus as profit.

How do advertising and branding affect monopolistic competition?

They differentiate products, help create inelastic demand, and allow partial price control.