econ conceptual 9 + 10

what is the monopoly equilibrium condition?

mr = mc

what is market power?

the ability of a firm to control pricing through manipulating supply

what are barriers to entry?

factors that prevent new firms from entering a market

what is a natural monopoly?

a market where one firm can produce total output at a lower average output at a lower average cost than multiple firms

what are switching costs?

the issues buyers face when changing from one product to another

what are network goods?

goods whose value increases as more people use them

what is product differentiation?

when consumers view products from different firms as imperfect substitutes

why is it that firms who control key inputs create market power?

because a firm that controls scarce inputs will have a cost advantage over competitors

why can government regulation create market power?

regulations like patents, copyrights, and licensing requirements make it harder to enter the market

why is marginal revenue less than the price for monopolies?

because selling more requires lowering the price on all units to convince consumers to buy more

how do monopolies maximize their profit?

they produce at a level where MR = MC, then use the demand curve to determine price

what happens when marginal cost increases in a monopoly?

the profit maximizing quantity decreases, while price increases

what happens when demand shifts outward for a monopoly?

the profit maximizing quantity and price both increase

how does elastic demand impact markup?

more elastic demand leads to a smaller markup

what is a markup?

it is how much the prices a firm charges exceed its marginal costs

what is the lerner index?

it is a measure of a firm’s markup percentage and level of market power

what happens when a monopoly output falls below the competitive level?

a deadweight loss occurs, making the market inefficient because the good is underproduced but overpriced

what is producer surplus?

it is the difference between the profit producers get and the cost of producing each unit, added together for all units sold

what is consumer surplus?

it is the difference between what buyers are willing to pay and the price they actually pay

what is price discrimination?

when firms charge different prices for the same product

what two conditions allow for price discrimination?

the firm must have market power and be able to prevent resale or arbitrage

what is first degree price discrimination?

charging each customer what the max price they are willing to pay (CS = 0)

what is second degree price discrimination?

when customers get to choose from set pricing options that best suits their needs

what is third degree price discrimination?

when firms charge customer groups different prices based on how badly they want the product

what are quantity discounts?

when firms lower the price for customers who buy in large amounts

what is versioning?

it is offering different versions of a product to attract customers with different demands

what is incentive compatibility?

it is when all pricing options encourages each customer group to select the option tailored for them

what is bundling?

it is when firms sell two or more products together at a one price

when is bundling the most useful?

when the firm holds market power and consumers’ demand for the products is negatively (oppositely) correlated

what is pure bundling versus mixed bundling?

pure bundling sells products only as a bundle while mixed bundling sells products both separately and as a bundle

what is block pricing?

when the price of a good drops the more a customer buys

what is a two part tariff?

a price strategy of charging the per unit price and a fixed free

what is the difference between direct and indirect price discrimination?

direct categorizes buyers and charges the different groups a different price while indirect gives customers different options and lets them choose

why does a firm need to prevent resale in order to price discriminate?

because buyers who receive lower prices could resell the producer to buyers who receive high prices

which customer group will receive a higher markup?

the group with inelastic demand

how does third degree price discrimination impact producer surplus?

it maximizes producer surplus (profit) by squeezing more money out of each consumer segment

what is arbitrage?

when someone buys a product at a lower price and reselling it at a higher price

what is the difference between a monopoly and perfect competition in pricing?

In a monopoly mr = p, but in perfect competition p > mr