Monopoly Flashcards

These flashcards cover key concepts related to monopolies, market power, barriers to entry, profit maximization, and government regulation.

What defines a monopoly?

A monopoly is the only seller of a good or service that has no close substitute.

What is the narrow definition of close substitutes in the context of monopolies?

In the narrow definition, a firm can ignore the actions of other firms, such as an electricity company.

What is the broader definition of close substitutes in relation to monopolies?

In the broader definition, economic profits are not competed away in the long run, as seen in a scenario like the only pizza seller in a small town.

Why are monopolies considered price makers?

Monopolies are considered price makers because they have market power and can set prices above marginal cost.

What are barriers to entry in the context of monopolies?

Barriers to entry include government actions, patents, copyrights, public franchises, control of key resources, network externalities, and natural monopolies.

How long does a patent last and why is it important?

A patent lasts for 20 years and is important for innovation, particularly in industries like pharmaceuticals.

What are public franchises?

Public franchises are when only one firm is the legal provider of a good or service, such as electricity or water.

What is a natural monopoly?

A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms due to high fixed costs.

What is the profit-maximizing condition for a monopolist?

A monopolist maximizes profit when marginal revenue (MR) equals marginal cost (MC).

How does a monopolist's output compare to that of a perfectly competitive firm?

A monopolist produces less output than a perfectly competitive firm would and sells it at a higher price.

What does market power allow a monopolist to do?

Market power allows a monopolist to raise prices above marginal cost.

What is the Lerner Index?

The Lerner Index is a measurement of a firm’s market power.

What economic issue arises because of monopolies?

Monopolies lead to deadweight loss (DWL) compared to a perfectly competitive market.

What is the role of antitrust laws?

Antitrust laws are designed to prevent monopolies and collusion among firms.

What is the Sherman Act?

The Sherman Act is the first antitrust law enacted in the US in 1890.

Why is regulation of natural monopolies necessary?

Regulation is necessary to reduce the deadweight loss (DWL) that occurs if the monopolies are unregulated.

What happens if the government sets price equal to marginal cost (P=MC) in the regulation of natural monopolies?

If price is set to marginal cost, the firm incurs losses in the long run, as marginal cost is typically below average total cost (ATC).

What are the two possibilities when regulating a natural monopoly?

Possibility 1: Set price equal to ATC for zero economic profit; Possibility 2: Set competitive price (P=MC) and compensate the firm for losses.