Monopoly & Market Power Lecture

Key vocabulary flashcards covering monopoly basics, sources of monopoly power, pricing, welfare effects, price discrimination, and public policy.

Monopoly

A single seller of a product with no close substitutes, giving the firm market power.

Market Power

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

Price Maker

A firm that can set the price of its output, characteristic of a monopoly.

Price Taker

A competitive firm that must accept the market price for its product.

Barriers to Entry

Obstacles that prevent other firms from entering a market, allowing monopolies to persist.

Monopoly Resources

When one firm owns a key resource required for production, creating monopoly power.

Government-Created Monopoly

A monopoly arising because the government grants exclusive production rights.

Patent

A government grant giving a firm exclusive rights to produce and sell an invention for 20 years.

Copyright

Legal protection giving an author exclusive rights to sell a creative work.

Natural Monopoly

An industry in which a single firm can supply the entire market at lower cost than multiple firms due to economies of scale.

Economies of Scale

Cost advantages that cause average total cost to fall as output increases.

DeBeers

Diamond company historically controlling up to 80% of world diamond production, illustrating monopoly resources.

Marginal Revenue (MR)

The additional revenue a firm receives from selling one more unit of output; for a monopoly, MR < Price.

Output Effect

When a monopoly sells more units, increasing total revenue.

Price Effect

When a monopoly lowers price to sell more, reducing revenue on previous units.

Profit Maximization (Monopoly)

Occurs where marginal revenue equals marginal cost (MR = MC).

Monopoly Pricing Rule

At the profit-maximizing quantity, monopoly sets Price > MR = MC.

Deadweight Loss (Monopoly)

Loss of total surplus because monopoly output is below the socially efficient level.

Consumer Surplus

Buyers’ willingness to pay minus the price they actually pay.

Producer Surplus

Amount producers receive minus their cost of production; for monopoly, equivalent to profit.

Total Surplus

Sum of consumer and producer surplus; maximized in competitive markets but not under monopoly.

Social Planner Outcome

Efficient quantity where demand intersects marginal cost, with price equal to marginal cost.

Price Discrimination

Selling the same good to different customers at different prices not based on cost differences.

Perfect Price Discrimination

Charging each customer exactly their willingness to pay, capturing all surplus as profit and eliminating deadweight loss.

Arbitrage

Buying in a low-price market and selling in a high-price market, undermining price discrimination.

Movie Ticket Discounts

Example of price discrimination using age to segment customers with different willingness to pay.

Saturday-Night Stay Rule

Airline pricing strategy separating business and leisure travelers for discrimination.

Coupons & Flash Sales

Price discrimination tools that target price-sensitive consumers willing to search for deals.

Financial Aid

College tuition discounting based on income, a form of price discrimination.

Quantity Discount

Charging a lower price per unit when a customer buys more, another discrimination method.

Antitrust Laws

Statutes intended to curb monopoly power and promote competition.

Sherman Antitrust Act (1890)

First major U.S. law prohibiting monopolistic practices and trusts.

Clayton Antitrust Act (1914)

Law that strengthened antitrust enforcement and allowed private lawsuits.

Horizontal Merger

Merger between firms in the same industry; closely scrutinized under antitrust law.

Vertical Merger

Merger between firms at different stages of production; usually less scrutinized.

Synergies

Cost savings or efficiencies gained when firms merge.

Public Ownership

Government ownership and operation of a monopoly, e.g., postal service or public utilities.

Regulation (Natural Monopoly)

Government rules, such as price caps, applied to control a private natural monopoly.

Monopoly Profit

Difference between price and average total cost, multiplied by quantity sold: (P – ATC) × Q.

No Supply Curve for Monopoly

Because a monopoly is a price maker, its quantity supplied cannot be described by a unique supply curve independent of demand.

Competitive Firm

A firm in a market with many competitors, selling an identical product, facing a horizontal demand curve.

Microsoft Antitrust Cases

Government actions challenging Microsoft’s market power, illustrating policy toward monopolies.