Monopoly Flashcards

Flashcards about Monopoly

Monopoly

A firm that is the sole seller of a product without close substitutes, giving it market power to influence the market price.

Market Power

Price Maker

• The ability of a firm to influence the market price of the product it sells.

Why Monopolies arise

Arise due to barriers to entry

• Conditions that prevent new firms from entering a market allow existing firms to maintain monopoly power.

Monopoly Resources (Barrier to entry #1)

A single firm owns a key resource required for production

Government-Created Monopolies (Barrier to entry #2)

Monopolies created by the government through exclusive rights to produce a good or service, such as patents and copyrights.

Natural Monopoly ((Barrier to entry #3)

• A single firm can produce the entire market Q at lower cost than could several firms

• Arises when there are economies of scale over the relevant range of output

• Distribution of water, electricity, etc.

• Club goods (excludable, not rival in consumption)

Economies of Scale

A firm that can produce the entire market quantity at a lower cost than could several firms.

Competitive firm

A firm that is one of many firms and is unable to affect the market price.

• Price taker

• Small, one of many

• Faces individual demand at P: perfectly elastic demand

Monopoly firm

• Price maker, market power

• Faces the entire market demand: downward sloping demand

Marginal Revenue (MR)

The change in total revenue from selling one more unit of a product; it is less than the price for a monopolist.

Increasing Q has two effects on revenue

• Output effect: higher output raises revenue

• Price effect: lower price reduces revenue

Marginal revenue, MR < P

• To sell a larger Q, the monopolist must reduce the price on all the units it sells  

• Is negative if price effect > output effect

Deadweight Loss

A situation where a monopolist produces a quantity that is too low, resulting in a loss of total surplus.

Price Discrimination

Selling the same good at different prices to different customers.

Perfect Price Discrimination

Charging each customer a different price exactly equal to his or her willingness to pay.

Antitrust Laws

Laws designed to prevent monopolies and promote competition.

Public Policy toward Monopolies

• Increasing competition with antitrust laws

• Regulation

• Public ownership: a government unit can run the monopoly itself

• Above all, do no harm

Monopoly Profit maximization

• Produce Q where MR = MC

• Set the highest price consumers are willing to pay for that quantity

Competitive Firm

Profit equals (P-ATC) x Q