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ECON 208 > Chapter 10: Monopoly, Cartels, and Price Discrimination > Flashcards

Chapter 10: Monopoly, Cartels, and Price Discrimination Flashcards

1
Q

What are the characteristics of perfect competition? (6)

A 
Many small firms
Firms sell identical products
All firms are price takers
Free market entry and exit
Zero profits in long run
P = MC
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2
Q

What is a monopoly?

A

A market containing a single firm (the monopolist)

A monopoly is the market structure that allows the firm to exert the most market power

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3
Q

What is the market demand curve in a monopoly?

A

The same as the firm demand curve of the monopolist

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4
Q

What is the total revenue of the monopolist if they charge the same price for all units sold? The average Revenue? Marginal revenue?

A 
TR = p x Q
AR = TR / Q = p
MR = dTR/dQ
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5
Q

How do you calculate Marginal Revenue as a monopolist?

A

MR = a - 2bQ

The MR curve’s slope (2b) is twice as much as the demand curve’s slope (b), but they start from the same origin

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6
Q

Why does the monopolist’s MR curve lie below its demand curve?

A

The monopolist must reduce the price for ALL units to sell an extra unit (because of the downward sloping demand curve)

Therefore the price received for the extra unit sold is not the firm’s marginal revenue. since the firm lost some revenue by reducing the price on all previous units

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7
Q

Why is elasticity greater than one when MR is 0 (or greater than one when MR is greater than 0, or less than one when MR is less than 0)?

A

If p = a - bq
elasticity = dq/dp x p/q = 1/bx(a-ba)/q

elasticity = 1 = (a-bq)/bq -> q = a/2b
recall MR = a - 2bq
MR = 0 -> q /2b

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8
Q

Compared to a competitive market, a monopolist produces (more/less) product, with a (higher/lower) price

A

Less, higher

The price exceeds MC

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9
Q

Are monopolies efficient?

A

No

For a given Q, the competitive price is much higher

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10
Q

What does the monopolist’s restriction of output create?

A

A deadweight loss for society

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11
Q

What are entry barriers? what are the two types?

A

Ways to allow monopolies to persist in the long run (despite incentives to enter)

natural
created

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12
Q

Define a natural monopoly

A

An industry characterised by economies of scale* sufficiently large enough that only one firm can cover its costs while producing at its minimum efficient scale

*Economies of scale: When the industry demand conditions allow no more than one firm to cover its costs while producing at its MES

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13
Q

What are two types of created barriers?

A

Those created by firms already in the market (organized crime, MAFIA)

Those created by government regulation (patents and copyright laws)

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14
Q

How can effective entry barriers be circumvented?

A

In the very long run, due to technological changes and innovations

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15
Q

What is Joseph Schumpeter’s notion of creative destruction?

A

The idea that the pursuit of monopoly profits provides incentives to innovate
Replacing one monopolist by another through innovation is called creative destruction

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16
Q

What is a cartel?

A

An organization of producers who agree to act as a single seller to maximize joint profits

The firms can agree to restrict their total output to the level that maximizes their joint profits

17
Q

What are anti-trust policies?

A

Policies that prevent the creation of large cartels that would possess considerable market power

18
Q

What is OPEC?

A

Organization of petroleum exporting countries

19
Q

What is DTC?

A

Diamond Trading Company (cartel)

20
Q

The profit-maximizing cartelization of a competitive industry _____ ouput and _____ price from the perfectly competitive level

A

Reduces

Raises

21
Q

What is a problem with cartels?

A

They tend to be unstable because members have an incentive to cheat

If price is raised, p > MC and gives individuals large incentive to cheat

22
Q

What happens if all firms in a cartel cheat?

A

The price falls back toward the competitive level, and joint profits will not be maximized

23
Q

What do successful cartels often do?

A

License firms in the industry and control entry by restricting number of licenses

24
Q

What 2 problems to cartels often face?

A

Enforcement of output restrictions (making sure individual firms don’t cheat)

Restricting entry

25
Q

What is price discrimination?

A

A producer practices price discrimination by charging different prices for the same product that have the same cost
If price differences are based on buyers’ valuations of the same product, they are discriminatory

26
Q

Which firms can benefit from price discrimination?

A

Any firm with a downward-sloping demand curve

27
Q

When is price discrimination possible?

A

When firms have market power
When consumers differ in their valuations of the product
When firms can prevent arbitrage

28
Q

What are 3 types of price discrimination?

A

Price discrimination among units of output
Price discrimination among market segments
Hurdle pricing

29
Q

How does a firm capture consumer surplus during price discrimination among units of output?

A

By charging different prices for different units sold

30
Q

How is profit maximized during price discrimination among market segments?

A

Increase price for segment with least elastic demand

31
Q

When will equating MRs in 2 markets will result in different prices?

A

When there are different elasticities of demand

AND members of different market segments must be identifiable

AND must be minimal or no arbitrage (so most used for ‘services’)

32
Q

What is hurdle pricing?

A

When firms create an obstacle that consumers must overcome to get a lower price

Separates consumers into two segments

Consumers who don’t want to jump the hurdle and are willing to pay the high price

Consumers who choose to jump the hurdle and benefit from the low price

33
Q

What is the type of price discrimination that leads to an increase in a firm’s output?

A

Price discrimination by unit

34
Q

During price discrimination, do consumers gain or lose surplus?

A

It’s hard to tell

ECON 208 (12 decks)

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