Microeconomics: Monopoly and Market Power

Vocabulary flashcards covering monopoly, pricing rules of thumb, monopoly power metrics, and market structure from Chapter 10 of Microeconomics by Pindyck and Rubinfeld.

Monopoly

A market structure characterized by having only one seller.

Monopsony

A market structure characterized by having only one buyer.

Market Power

The ability of a seller or a buyer to affect the price of a good.

Marginal Revenue

The change in total revenue resulting from a one-unit increase in output, expressed as $\frac{\Delta R}{\Delta Q}$.

Profit-Maximizing Condition for Monopoly

The operating output level where marginal revenue equals marginal cost ($MR = MC$), meaning the incremental profit resulting from a small increase in output is zero ($\frac{\Delta \pi}{\Delta Q} = 0$).

Rule of Thumb for Pricing

A practical formula that expresses price directly as a markup over marginal cost based on the firm's price elasticity of demand: $P = \frac{MC}{1 + (1/E_d)}$.

Lerner Index of Monopoly Power

A measure of monopoly power calculated as the excess of price over marginal cost as a fraction of price: $\frac{P - MC}{P} = -\frac{1}{E_d}$.

Monopoly Supply Curve

A curve that does not exist for a monopoly because there is no one-to-one relationship between price and quantity produced; the output decision depends on marginal cost and the shape and elasticity of demand.

Specific Tax Effect on Monopoly

The imposition of a tax of $t$ dollars per unit which increases effective marginal cost to $MC + t$, shifting output down and potentially raising the price ($\Delta P$) by an amount larger than the tax itself.

Barrier to Entry

Any condition that impedes entry by new competitors into a market, such as patents, copyrights, licenses, or large economies of scale.

Natural Monopoly

A situation in which economies of scale are so large that it is most efficient for a single firm to supply the entire market.

Market Concentration

A market environment in which a small number of firms account for the majority of industry sales.

Collusion

An explicit agreement among firms to limit output and raise prices in concert, which increases monopoly power but violates antitrust laws.

Sources of Monopoly Power

The three structural determinants of a firm's demand elasticity: the elasticity of market demand, the number of firms in the market, and the interaction among firms.