ECON 211 Chapter 15 Monopoly

monopoly

firm that is the sole seller of a good with no substitutes (price setters)

1st cause of monopoly or barrier to entry

monopoly resource when firm owns or controls a key input

2nd cause of monopoly or barrier to entry

government created monopoly when government grants a firm exclusive right to produce

examples of government created monopoly

patents and copyrights to incentivize innovation and creativity

3rd cause of monopoly or barrier to entry (high fixed costs)

natural monopoly when a single firm provide good to entire market at lower cost than could multiple firms

1st type of monopoly

single price monopolist

single price monopolist

firm can only charge some price to all buyers

2nd type of monopoly

price discriminatory monopolist

price discriminatory monopolist

firm can charge different prices to different buyers

profit maximization for single price monopolist

face the entire market demand curve and chooses q that satisfies MR=MC

price and MR relationship

MR<P, MR is decreasing faster than price

where on the graph does a monopolist maximize profit?

Qm and Pm

Monopoly markup is the

difference between Pm and MCqm

Monopoly Profit=

(P-ATC)Q

why is monopoly inefficient?

not maximizing total surplus

markup with inelastic demand is 

large

markup with elastic demand is

small

price discriminatory monopolist

ability of a firm to charge different prices for a good to different buyers

requirements of price discrimination 

ability to segment buyers based on wtp and prevent arbitrage

perfects price discrimination/first degree

charges each buyer a price equal to wtp

imperfect price discrimination

catergorizes buyers into groups based on wtp

second degree of price discrimination

based on characteristics of purchase

first type of second degree

tying, where in order to use 1 good, you must buy a second good made by same firm

base good

low mark up, both low and high wtp buy

variable good

high markup and high wtp buy

second type of second degree

bundling, where good must be bought in bundle

third degree price discrimination

based on characteristics of buyers