Pure Monopoly Notes

Pure monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.

Barriers to entry

Anything that artificially prevents the entry of firms into an industry.

Natural monopoly

An industry in which economies of scale are so great that a single firm can produce the industry’s product at a lower average total cost than would be possible if more than one firm produced the product.

Network effects

Increases in the value of a product to each user, including existing users, as the total number of users rises.

Simultaneous consumption

The same-time derivation of utility from some product by a large number of consumers.

X-Inefficiency

The production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output.

Rent-seeking behavior

Attempts by individuals, firms, or unions to use political influence to receive payments in excess of the minimum amount they would normally be willing to accept to provide a particular good or service.

Price discrimination

The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.

Socially optimal price

The price of a product that results in the most efficient allocation of an economy’s resources and that is equal to the marginal cost of the product.

Fair return price

For natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to average total cost.

Dilemma of regulation

The trade-off faced by a regulatory agency in setting the maximum legal price a monopolist may charge: The socially optimal price is below average total cost (and either bankrupts the firm or requires that it be subsidized), while the higher, fair-return price does not produce allocative efficiency.