8. Micro -- Profit Maximization under Monopoly -- Dunbar

Monopoly

This term refers to a market controlled by a single firm. The firm producing a unique product with no close substitutes and the monopolist exerts considerable control over its price. Examples -- Charter cable TV, Alliant Energy (or MG&E), Garbage collection companies in a given area, government-run water/sewage treatment plants, etc.

"Barriers to Entry"

Factors that limits competition in an industry by keeping out (at least to some degree) some potential firms. As these factors increase and become more complete, the degree of "monopoly power" by dominant firm(s) increases.

Natural Monopoly

This type of monopoly power develops when one firm experiences major "economies of scale" as they get larger and larger and larger. That is, if one firm gets bigger and is able to produce more cost effectively (than if there were more small firms), it is "natural" to have one firm control the market.

Strategic Resource Monopoly

This type of monopoly power develops when a firm controls an input or inputs desired by consumers and/or needed by other firms.

Government Monopoly

This type of monopoly power exists when the government is the only provider of a particular good or service in a given market.

Legal Monopoly

This type of monopoly power exists when a privately-owned business is granted the exclusive right by the government to be the provider of a good or service in a given market.

Patent Monopoly

This type of monopoly power develops when a firm has acquired patent rights, copyright protection, etc. that insulates the firm from competition.

Network Monopoly

This type of monopoly power exists when a firm comes to dominate a market due to the fact that a critical mass of people or firms (the "network" idea) is using the good or service. This leads others to adopt the good or service even if the good or service is the not the best possible product.

Consumers' Surplus

The difference between the maximum amount consumers are willing to pay for a good or service and the amount they actually do pay.

Producers' Surplus

The difference between the minimum amount producers need to receive in order to product a good or service and the price they actually sell their product for.

Social Surplus/Welfare

The sum of Consumers' Surplus and Producers' Surplus.

"Dead-Weight Loss"

Also called "social welfare loss" or "social inefficiency." "Dead-weight loss" measures the reduction in social surplus/welfare as a result of prices deviating from the perfectly-competitive price.

"Fair-Return Pricing"

A pricing policy whereby a governmental regulatory body sets the price a firm (typically a "natural monopoly" firm) can charge such that the firm will make a "normal profit" (i.e. $0 economic profit).

"Two-Part Tariff Pricing"

A two-part pricing policy whereby a governmental regulatory body pushes a firm to produce the socially-best level of output while allowing the firm to make a "normal profit" (i.e. $0 economic profit). This two-part pricing scheme includes a fixed fee plus a variable user fee to allow the firm to achieve these normal profits.

Price Discrimination

The practice of charging different prices to different groups of people for the exact same good or service.