Imperfect Competition and Monopoly

Flashcards reviewing key concepts related to imperfect competition, monopolies, and their impact on markets.

What characterizes imperfect competition?

Firms have some degree of market power.

In imperfect competition, are firms price takers or price makers?

Firms are more able to determine prices (price makers).

What is a monopoly?

A firm is the sole seller of a product without close substitutes; a price maker.

Name one example of a company exhibiting monopoly power.

Microsoft Windows (operating systems) or Google (search engine).

What is the fundamental cause of monopolies?

Barriers to entry.

List a type of barrier to entry that creates monopolies

Monopoly resources, government-created monopolies, natural monopolies, external growth.

What is a natural monopoly?

When a single firm can supply a good or service to an entire market at a lower cost than could two or more firms due to economies of scale.

Why are monopolies allocatively inefficient?

They distort markets.

How do competitive and monopoly firms differ regarding the demand curve they face?

Competitive firms face a horizontal demand curve (price takers), while monopolies face a downward-sloping market demand curve.

Why is a monopoly's marginal revenue (MR) less than the price of its good (except for the first unit)?

Because the monopoly faces both an output effect and price effect; to sell one more unit, it must lower the price.

At what point does a monopoly maximize profit?

By choosing the quantity at which MR equals MC.

How does the profit maximization condition differ between a competitive firm and a monopoly?

Competitive firm: P = MR = MC; Monopoly firm: P > MR = MC.

How is a monopoly's profit calculated?

Profit = (P - ATC) x Q.

How does a benevolent monopoly differ from a non-benevolent monopoly?

A benevolent monopoly maximizes social welfare (output where demand = MC), while a non-benevolent monopoly maximizes profit (charges a price above MC, leading to deadweight loss).

What is price discrimination?

Selling identical units of output at different prices.

What are the forms of price discrimination?

Perfect price discrimination, non-linear pricing, and market separation.

What is perfect price discrimination?

Each consumer pays a price equal to their willingness to pay (WTP).

What is non-linear pricing?

Selling a schedule of quantities at different prices per unit (e.g., block pricing).

What is market separation as a type of price discrimination?

Dividing customers into groups based on their valuation of the good and charging different prices (e.g., senior discounts).

What conditions are necessary for market separation to be effective?

Resale must be prohibitive, and the monopolist must be able to separate customers into groups.

List some solutions to reduce the harm caused by monopolies.

Make markets more competitive, regulate the monopolist’s price, turn private monopolies into public enterprises.

How does regulating a monopolist's price at P=ATC affect profit?

Gives the monopoly zero profit but assures they remain in the market.

List a key takeaway about monopolies.

Compared to perfect competition, a monopolist produces too little and charges too much, leading to inefficiency.