Economics - The Firm and Market Structures - Monopoly and Concentration

Question 1

what are the 3 barriers to entry for monopoly markets?

Answer 1

• economies of scale (natural monopoly)
• government licensing and legal barriers
• resource control (water etc…)

Question 2

what are the price setting strategies for a monopoly?

Answer 2

single-price

price discrimination (charging different customers different prices. e.g. cost of PPV for home vs bar)

Question 3

do monopolists get more money from setting single prices or price discriminating?

Answer 3

price discrimination

Question 4

what is the key assumption for price discrimination?

Answer 4

the customers can’t resell the product to each other

Question 5

what is another financial benefit of price discrimination?

Answer 5

there is less DWL (deadweight loss). This is the consumer surplus (caused by firms charging less than the maximum the consumers is willing to pay)

Question 6

what would be the outcomes of perfect price discrimination?

Answer 6

• each customer charged the max they’re willing to pay
• no DWL
• produce same quantity as perfect comp
• no consumer surplus (all surplus does to producer)

it is efficient!

Question 7

when do natural monopolies form?

Answer 7

• tend to have significant economies of scale
• ATC declines as output increases
• often high FC industries
• MC tends to be low

e.g. utilities

Question 8

how are monopolies regulated?

Answer 8

• average cost pricing: reduce pricing to where ATC intersects the market demand curve (increases output and social welfare and economic profit = 0)
• marginal cost pricing: reduce price to where MC intersects the demand curve MC=price (may lead to a loss and require government subsidy if MC

Question 9

describe the firm’s supply curve under perfect comp

Answer 9

• MC curve above AVC (as long as this is the case the firms will keep operating in the SR)
• defined as: market supply = sum of supply of market participants

Question 10

describe the firm’s supply curve under monopolistic comp, oligopoly and monopoly

Answer 10

• no well-defined supply function (can’t construct quantity supplied as a function of price)
• supply driven by intersection of MR and MC; price is then determined by the demand curve

Question 11

what is the pricing strategy in perfect comp

Answer 11

price = MR = MC

• price is equal to MR due to perfectly elastic demand curve
  MR=MC is profit max point

Question 12

what is the pricing strategy in monopolies and monopolistic competition

Answer 12

produce Q where MR=MC, P>MR

Question 13

what are pricing strategies for oligopolies

Answer 13

optimal pricing stategies depend on how other firms are expected to react

Question 14

how do we identity the correct market structure?

Answer 14

estimate price elasticity of demand

• often not enough reliable data
• elasticity can change over time

concentration ratios
- much simpler measures than elasticity

Question 15

what is the N-firm concentration ratio?

Answer 15

Sum of the % market shares of the N largest firms in the industry

• market share is defined as = firms sales/total market sales
• lower ratios indicate competitive market; higher ratios indicate oligopoly

Question 16

what are the disadvantages of N-firm concentration ratio?

Answer 16

• ignores barriers to entry

- largely unaffected by mergers

Question 17

what is the Herfindahl-Hirschmann Index (HHI) concentration ratio?

Answer 17

Sum of squared market shares of N largest firms in a market (change percentages to decimals)

• 0.1 to 0.18 = moderately competitive
• 0.18+ = uncompetitive

Question 18

what are the pros and cons of the HHI?

Answer 18

pros
- more sensitive to mergers

cons

• ignores barriers to entry
• ignores demand elasticity