Monopoly Flashcards
Monopoly Assumptions
-High barriers to entry (abnormal prof possible)
-One seller vs price taking customers
-perfect information
-profit maxing (MR=MC)
-^in LR produces @ p >= AC
What are the positives of a Monopoly market?
- Economies of scale
- may be necessary for:
-Research and development
-Innovation
What are the negatives of a Monopoly market?
- Fall in consumer welfare (and Aggregate econ. Welfare)
- Income is redistributed from consumers to producers
- allocatively inefficient; DWL exists (Econ Costs may be higher than DWL as it doesn’t include cost of deterring competition))
What is Monopoly (market) Power? How is it measured?
- Is the Monopoly’s ability to control the prices and output in the market
- Monopoly Power is measured using the Lerner index
Lerner Index Characteristics
- L = (p-MC)/p
- Also L = 1/|PED|
What is the relation between Monopoly Power and Elasticity (PED)? Why does a monopoly only produce in elastic markets?
- As PED Rises, Mkt Power (L) Falls
- Monopoly can only produce when PED = elastic because at
<Unit elastic, MR<0… and -MC = impossible :. Profit maxxing is impossible
What is PED dependent on?
- Quantity demanded (Qd) (and fluctuations in price)
- If Qd goes up then PED -> more elastic
What is the Coase Conjecture/Problem?
By selling today, the monopolist faces a reduced
demand tomorrow. To sell to the residual demand the monopolist
lowers the price tomorrow. But consumers ought to expect this
price decrease and hold back on their purchase today
Solutions to the coase conjecture?
-gain a strong reputation
-Commit to not lower price
- renting vs selling
-agree to be fined if lower price
-keep limited stocks
what happens to a durable good monopolist’s profits when price changes are frequent?
converge to 0 profits
what happens if a durable good monopolist gets consistent consumers?
no coase conjecture, profits forever.
When would selling prevail over renting (Durable good monopolist)
when we have high types and low types and we can efficiently segregate between the two (Discriminate)
ie. Selling is preferable when there is Consumer Segregation (differentiation to which consumers arent indifferent)
what impact does the discount factor have on a durable good monopolist consumers
will buy at high price if DF (discount factor) is close to 0 as they would prefer to buy now—–if willingness to pay - price > the DF * willingness to pay - future(lower) price
Lower DF = Less likely to buy @ future price
How might a goverment regulate a standard monopoly? and what are the implications of this?
use of Price caps:The p is set and does not change, even if the cost changes (Then maximum incentive for cost reduction, quality reduction etc)
or average cost pricing:The firm is forced to set the lowest price consistent
with making non-negative profits.(: no incentive for cost reduction)
how might a goverment regulate an essential monopoly(vertically integrated monopoly)? Implications?
ECPR (Efficient Component Pricing Rule)- t the access fee paid by the rival
to the monopolist should be equal to the monopolist’s
opportunity costs of providing access, including any
forgone revenues for allowing access to the rival
- ECPR allows the downstream firm to survive only if
they are competitive with respect to the vertically
integrated firm. (need lower costs or else no survival) - The ECPR states that the maximum price T&M1
can
charge M2
is w2 = p1- c1
M2’s margin: p2- (c2 + w2) = p2- c2 - (p1- c1)
‘
works if c1>c2 otherwise if c1+c2 the best m2 can do is set pm and equate 0 profits
