Monopoly Practice Flashcards

Vocabulary flashcards covering the characteristics, behaviors, costs, and regulations associated with monopolies as described in Chapter 9.

Monopoly

A market with one firm, no close substitutes for the product, significant barriers to entry, substantial market power, and potential long-run economic profit.

Price Maker

A firm, such as a monopolist, with substantial market power and control over the price of its product.

Barriers to Entry

Sources of market power that prevent other firms from entering an industry, such as control of a key input, economies of scale, or government protection through patents and copyrights.

Economies of Scale

A source of market power derived from large fixed costs that make it more efficient for production to be carried out by a single large firm.

Government Protection

Barriers to entry provided by the government in the form of patents and copyrights to protect intellectual property.

Profit Maximization Rule

The rule used by both monopolies and perfectly competitive firms stating that profit is maximized at the quantity where $MR = MC$.

Marginal Revenue ($MR$)

The change in total revenue divided by the change in quantity ($ΔTR / ΔQ$). For a monopolist, $MR$ is less than price ($P$).

Monopoly Profit Formula

The calculation for profit expressed as $(P - ATC) \times \text{Quantity}$.

Deadweight Loss

The inefficiency in a market created by a monopoly because the price is higher and output is lower compared to competitive conditions.

Rent Seeking

Costly actions, such as lobbying, taken by firms to avoid or limit competition.

X-Inefficiency

Inefficiency that occurs when monopolies squander resources on perks and lavish retreats rather than productive activities.

Price Discrimination

The practice of charging consumers different prices for the same product.

First-Degree Price Discrimination

Also known as perfect price discrimination, this occurs when firms capture all consumer surplus by charging each consumer their maximum willingness to pay.

Second-Degree Price Discrimination

A pricing strategy where firms charge different prices based on the quantity purchased by the consumer.

Third-Degree Price Discrimination

A pricing strategy where firms charge different prices to different groups of consumers based on their elasticities of demand.

Arbitrage

The practice of buying a product at a low price and reselling it at a higher price; price discrimination requires that firms be able to prevent this.

Natural Monopoly

A monopoly where large economies of scale make one firm more cost-efficient than multiple firms, often including utility companies and the U.S. Postal Service.

Average Cost Pricing Rule

A regulatory requirement where natural monopolies must charge a price no more than $ATC$, being higher than the competitive price but lower than the monopoly price.

Rate of Return Regulation

A regulatory approach that allows a firm to earn a normal return on its investment.

Price Caps

Maximum prices that firms can charge, which are adjusted according to cost conditions.

Antitrust Policy

Policies and laws aimed at preserving competition and preventing monopolies with maximum market power from arising.

Sherman Antitrust Act ($1890$)

Law providing criminal penalties for attempts to monopolize an industry.

Clayton Antitrust Act ($1914$)

Law forbidding contracts and other arrangements that limit competition.

Federal Trade Commission Act ($1914$)

Law designed to protect consumers from unfair or deceptive business practices.

Concentration Ratio

The share of total sales accounted for by the largest firms in an industry, typically the top four or eight.

Herfindahl-Hirschman Index ($HHI$)

The sum of the squares of market share held by each firm, ranging from $0$ to $10,000$, used to evaluate market concentration and mergers.

Moderately Concentrated Industry

An industry where the Herfindahl-Hirschman Index ($HHI$) is between $1,500$ and $2,500$.

Highly Concentrated Industry

An industry where the Herfindahl-Hirschman Index ($HHI$) is greater than $2,500$.

Contestable Market

An industry in which the threat of competition keeps prices low even if there is only one firm.

Monopsony

A term coined by Joan Robinson in $1933$ to describe industries controlled by one major employer.