Monopoly

Perfect monopoly

A market structure where there is one seller with 100% of market share

Monopoly power

Large firm that controls slightly less than 100% of market

Conditions for monopoly

Unique products, huge barriers to entry

Examples of barriers to entry for monopoly

Control of scarce resources, economies of scale, government intervention, aggressive business tactics

Economics of scale — demand and supply sides

demand - network good: a market where the benefits for users increases with total number of other users (i.e. Instagram, Waze, NFL); supply - natural monopoly: a single firm can produce the entire quantity of output demanded at a lower price than multiple firms (usually high FC and low MC of additional users)

Government intervention tactics

patents and copyrights

Aggressive business tactics

buying up competitors, predatory pricing

Monopoly P, D, and MR

P = D > MR because monopolists are subject to the law of demand, so higher prices lead to fewer customers 

Monopoly DWL

Total surplus that WOULD exist in perfect competition equilibrium but is destroyed by a monopolist (mutually beneficial transactions go away because monopolist has power to restrict output and charge more)

Why would the government regulate a monopoly? Why not?

Consumers worse off, promotes efficiency, variety, and new entrants, lobby power of new entrants; network good, monopoly profit provides incentive for initial innovation, lobbyists, all govt. interventions have side effects

How would a government regulate monopolies?

Public ownership - government takeover, price controls - usually price ceiling called cost of service regulation, horizontal/vertical split

Government takeover pros and cons

Pros: broader services, lower price; cons: loss of profit motive leads to inefficiency/slowness (i.e. DMV)

Price control cons

shortage, new DWL, hard to know firms true costs and whether regulation will cause them to be unprofitable

Horizontal shifts, vertical shifts, and their cons

One firm split into many smaller ones with the same function; one firm splits into many smaller ones with different functions based on steps in supply chain; disrupts economies of scale, difficult to force former coworkers to compete 

Types of monopoly shifts

D increases, D decreases, costs increase, costs decreases, D decreases AND IS FLATTER (gets droopy) → only when there is a new substitute

Price discrimination definition & requirements

charging different customers different prices based on WTP; no Pcomp, different WTP of consumers, no arbitrage (buying something low and selling it for higher)

Perfect price discrimination

All individuals pay their own WTP (auction, college & FAFSA)

Direct price discrimination

firm knows the group before they purchase something (i.e. student ID, online location, etc.) → segmenting, which is charging different groups different prices

Indirect price discrimination

know your group only when you buy, leads to quantity discounts (i.e. punch cards for certain amount of purchases), versioning (different types of good), coupons, bundling