Ch16: Monopoly Economics: Market Power, Price Discrimination, and Policy

What defines a monopoly?

A firm that is the sole seller of a product without close substitutes.

What is market power in the context of a monopoly?

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

What are barriers to entry?

Obstacles that prevent other firms from entering the market to compete.

What is a monopoly resource?

A situation where a single firm owns a key resource required for production.

Give an example of a monopoly resource.

The DeBeers diamond company, which owns most of the world's diamond mines.

What is a government-created monopoly?

A monopoly established by the government granting a single firm exclusive rights to produce a good.

What is an example of government regulation leading to a monopoly?

Patents for new pharmaceutical drugs.

What is a natural monopoly?

A situation where a single firm can produce the entire market quantity at a lower cost than multiple firms.

What is the significance of economies of scale in a natural monopoly?

They allow a single firm to produce at a lower average total cost over the relevant range of output.

What is the difference between a competitive firm and a monopoly in terms of price?

A competitive firm is a price taker, while a monopoly is a price maker.

How does a competitive firm face demand?

It faces perfectly elastic demand at the market price.

What happens to marginal revenue (MR) for a monopolist when increasing quantity?

MR is less than price (P) because the monopolist must lower the price on all units sold.

What is the relationship between price (P) and average revenue (AR) for a monopolist?

P equals AR, the same as for a competitive firm.

What is the profit-maximizing condition for a monopoly?

Produce quantity (Q) where marginal revenue (MR) equals marginal cost (MC).

What indicates a monopoly is earning a profit?

If price (P) is greater than average total cost (ATC).

What are the two effects on revenue when a monopolist increases quantity?

Output effect (higher output raises revenue) and price effect (lower price reduces revenue).

What is price discrimination?

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

What are club goods?

Goods that are excludable but not rival in consumption.

What is the demand curve shape for a monopoly?

Downward sloping, as it faces the entire market demand.

What is the implication of MR < P for a monopolist?

The monopolist must lower the price to sell additional units, leading to a decrease in marginal revenue.

What happens to the average total cost (ATC) curve in a natural monopoly?

The ATC slopes downward due to large fixed costs and small marginal costs.

How do monopolies affect society's well-being?

They can lead to higher prices and reduced output compared to competitive markets.

What can the government do about monopolies?

Implement regulations, antitrust laws, or break up monopolies to promote competition.

What is the relationship between price and marginal revenue for a competitive firm?

For a competitive firm, MR equals P.

What is the effect of a monopolist increasing quantity from 6 to 7?

The price must decrease for all units sold, leading to MR being less than P.

What is the primary goal of a monopoly in terms of pricing?

To set the highest price consumers are willing to pay for the quantity produced.

What is the formula for calculating a monopolist's profit?

(P - ATC) x Q

How does a monopolist differ from a competitive firm in terms of pricing?

A monopolist is a 'price-maker' and does not have a supply curve; quantity (Q) is determined by marginal cost (MC), marginal revenue (MR), and demand.

What happens to the market when a drug patent expires?

The market becomes competitive, leading to the introduction of generic drugs.

What is the welfare cost of monopolies?

Monopoly equilibrium occurs at P > MR = MC, resulting in a deadweight loss and reduced total surplus.

What is deadweight loss in the context of monopoly?

It is the loss of economic efficiency when the quantity produced by a monopoly is less than the efficient quantity.

How can a firm increase profit through price discrimination?

By charging higher prices to buyers with a higher willingness to pay.

What is perfect price discrimination?

It involves charging each customer a different price based on their exact willingness to pay, allowing the monopoly to capture all consumer surplus.

Why is perfect price discrimination not feasible in the real world?

Firms cannot know every buyer's willingness to pay, and buyers do not reveal this information.

Provide an example of price discrimination in the real world.

Discounts for seniors, students, or weekday matinee movie tickets.

What is the impact of a monopoly on consumer surplus?

Monopolies typically reduce consumer surplus while increasing producer surplus.

What is the relationship between price (P) and marginal cost (MC) in a monopoly?

In a monopoly, price is greater than marginal cost (P > MC).

What is the total revenue (TR) formula for a single price monopoly?

TR = P × Q

Calculate the profit for a single price monopoly with P = $18 and Q = 1,000.

Profit = TR - TC = $18,000 - $10,000 = $8,000.

Calculate the profit if the price is dropped to $5 and Q increases to 2,500.

Profit = TR - TC = $12,500 - $10,000 = $2,500.

What is the total profit when using price discrimination with P1 = $18 and P2 = $5?

Profit = TR1 + TR2 - TC = $18,000 + $7,500 - $10,000 = $15,500.

What is the effect of monopoly on the quantity produced compared to a competitive market?

Monopoly produces a lower quantity (Q < efficient quantity) than a competitive market.

What is the significance of the marginal revenue curve for a monopolist?

The marginal revenue curve is downward sloping and lies below the demand curve for a monopolist.

What does the term 'producer surplus' refer to in monopoly?

It refers to the difference between what producers are willing to accept for a good versus what they actually receive.

How does a monopoly affect total surplus in the market?

A monopoly reduces total surplus due to the deadweight loss created by producing less than the socially optimal quantity.

What is the implication of a monopoly's pricing strategy on consumer choice?

Monopoly pricing limits consumer choice and can lead to higher prices and reduced access to goods.

What role do patents play in the context of monopolies?

Patents grant temporary monopolies to sellers, allowing them to set higher prices before competition enters the market.

What is the outcome of a monopoly's pricing strategy on economic welfare?

Monopolies can increase profits but often at the expense of economic welfare due to inefficiencies.

What is a common method of price discrimination used by airlines?

Offering discounts for Saturday-night stayovers to differentiate between business and leisure travelers.

What is the primary reason monopolies are considered inefficient?

They produce less than the efficient quantity, leading to a deadweight loss.

What is the primary factor influencing financial aid for students?

Family income

How do wealthy families typically approach tuition costs?

They have a higher willingness to pay.

What is price discrimination in economics?

Charging different prices for the same good based on a buyer's willingness to pay.

What is an example of quantity discounts?

A movie theater charging $7 for a small popcorn and $9 for a large one that's twice as big.

What is the purpose of antitrust laws?

To increase competition and prevent monopolistic practices.

Name two significant antitrust acts in U.S. history.

Sherman Antitrust Act (1890) and Clayton Antitrust Act (1914).

What is the outcome of setting price equal to marginal cost for monopolies?

It can lead to losses if marginal cost is less than average total cost.

What is one potential solution for monopolists to avoid losses?

Setting price equal to average total cost for zero economic profit.

What is a common criticism of public ownership of monopolies?

It is often less efficient due to the lack of profit incentive.

What is the main argument against government intervention in monopoly pricing?

Government actions may inadvertently worsen the situation.

What is a pure monopoly?

A market structure where a single seller dominates the market.

What can lead to a firm having market power?

Selling a unique product or having a large market share with few competitors.

What is deadweight loss?

The loss of economic efficiency when the equilibrium outcome is not achievable.

How does a monopoly maximize profit?

By producing where marginal revenue equals marginal cost.

What are policymakers' options regarding monopolies?

Use antitrust laws, regulate prices, turn monopolies into government enterprises, or do nothing.

What is the effect of price discrimination on economic welfare?

It can raise economic welfare by allowing some consumers to purchase goods they otherwise wouldn't.

What is a common argument regarding airline pricing practices?

Different prices for passengers can be seen as unfair and inefficient.

How do airlines typically segment their customers?

By willingness to pay, often leading to varied ticket prices.

What is the relationship between market power and price markup?

Firms with market power can charge a price higher than marginal cost.

What is the implication of a downward-sloping demand curve for monopolies?

Marginal revenue is less than price for monopolists.

What is the result of monopolies producing at a quantity where price exceeds marginal cost?

It leads to deadweight loss in the market.

What is the significance of the phrase 'Above all, do no harm' in monopoly policy?

It emphasizes caution in government intervention to avoid worsening market conditions.

What is the potential benefit of regulating monopolists' prices?

To ensure fair pricing and prevent excessive profits at the expense of consumers.

What is a key challenge in regulating natural monopolies?

Determining the appropriate price level to set without causing losses.

What is the potential downside of mergers in competitive industries?

They can reduce competition and lead to higher prices for consumers.

What is the role of government in addressing monopolistic practices?

To ensure competition and protect consumer interests through regulation and antitrust laws.