Topic 10: Monopoly and Market Power

Question 1

monopoly

Answer 1

single large price-setting firm where there are barriers to entry and exit

Question 2

monopoly and FTWE

Answer 2

price-setter rather than taker so immediately nullifies FTWE

Question 3

monopoly in the edgeworth box

Answer 3

unexploited gains from trade
- to realise them, A would have to change price-ratio which affects gains from trades from the resulting allocation

assumption that A sets a price ratio applying to all trades equally

Question 4

socially efficient amount of production of a good

Answer 4

socially efficient to produce extra units of a good as long as marginal cost of the extra unit is less than what some consumer is willing to give up for that unit

Question 5

monopolist optimal choice and social efficiency

Answer 5

monopolist produces less than is socially efficient
- effect on the price of inframarginal units means that profits are lower

Question 6

price discrimination

Answer 6

first-degree/perfect: selling different units of output for different prices to different people

second-degree: selling different units of output for different prices but prices are the same if you buy the same amount

third-degree: selling output to different people at different prices but prices are the same for every unit sold to a given person

Question 7

bundling

Answer 7

selling more than one good in a package

might help lower the AC of each component or that goods are complementary

might also be a way to exploit market power and extract surplus

Question 8

general principle with market power

Answer 8

if you have price-setting power, you are more profitable with creative, non-uniform pricing

Question 9

FTWE - what is lost in the general equilibrium system when there is market power

Answer 9

if an entity’s choices influence market price, FTWE fails

prevailing prices distorted away from the scarcity-signaling prices of competitive equilibrium