Flashcards in PHASE 2- Adobe Ch.8: Pure Monopoly Deck (54):
1
pure monopoly exists when
there is one single seller- no close substititues, firm and industry synonymous, ppl who dont buy product do without it
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pure monoply is the price ___
maker
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what does it mean to be the price maker
controls total Q supplied and has considerable conrol over price, confronts usual downward sloping product demand curve, change product price by changing Q product it produces
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blocked entry
entry baririers that prohoibit frims fro entering industry
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four prominent barriers to entry / blocked entry
economies of scale, patents/liscense, ownership/control of essential resources, pricing and other stategic barriers to entry
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economies of scale
declining total average cost - when economies of scale are extensive, firm's long run avg cost curve will decline over wide range of output, only a few large firms/or a single firm can achieve low ATC, protects monopoly from competition
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patents and licenses
gov creates legal barriers to entry through patents and licensing
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patents
exclusive rigt of inventor to use/allow another to use his/her invention provides inventor with monopoly position for life of patent
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licensing
at national level- federal communications commission licenses only so many radio/tv stations in each geographic area -ie limiting taxicabs allowed in large cities thru license
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control of essential inputs
if single firm controls an input essential to production of a given product, that firm will have market power
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near monopoly
single firm has bulk of sales in specific market ie. intel
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strategic pricing
entry can be blocked by way monopolist - create entry barriers, response to attempts by rivals to enter industry.. slash prices, step up advertising
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pure monopoly has
strong barrierse to entry effecivly blocking all potential compeition
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somewhat weaker barrierse permit
oligopoly - market structure dominated by a few firms
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monoplisitic competition is
enter large number of firms
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crucial difference between pure monoplist and a purely competitive seller lies on which side of the market
demand side
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purely competitive seller faces
perfect elastic demand at price determined by market s/d, each additional unit sold adds amount of constant product price to firms TR; MR for competitive seller is constant, qual to product price P = MR
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pure monopoly in the market
demand curve is market demand curve, downarwad sloping demand curve- increase sales only by charging lower price, MR less than price, MR not equal to output price, Gain minus Loss equals MR
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why is MR less than Price
bc lower price of extra unit also applie sto all prior units, each additioal unit of output sold increases TR by amount equal to its ow price less than the sum of the price cuts that apply to all prior units of output
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MR is ALWAYS ____ price
less than
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MR can be
negative, add revenue from selling one more unit of output isnt big enought o cover loss in revenue due to price reduction for all rprevious units
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monopolist's MR curve has ____ slope of straight line demand curve
two times steeper
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as output increases, firm's additional revenue ____
drops two times as fast as does price firm can charge consumers
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for society where is MB, and where is MB for firm monopoly
D = MB society
MR = MB firm
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in a purely competitive market, where is productive efficiency? allocative efficiency? is it efficient
prod efficiency- P =minATC
allocative effic- P=MC
yes efficient, sum of productive and consumer surplus made as large as possible
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pure monopoly, where is optimization, efficient or not?
MR = MC rule --> monoplogy maximize profit by producng lower ouptu and charging higher price, not efficient - output is less than required for ahieving min ATC and bc monoplist price exceeds MC
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monopoly - profit maximizing rule, P and MR relationship, P and MC relationship, deadweight loss?
MR = MC rule
P greater than MR - reality - D curve lies above
P greater than MC - effect
deadweight loss effect
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perfect competition - profit maximizing rule, P and MR relationship, P and MC relationship, deadweight loss?
MR = MC rule
P = MR reality MR. D.AR.P
P = MC effect
no deadweight oss effect
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four complications leading to cost differences
economies of scale, x inneficinecy, rent seeking expenditure, technological avance/advantage
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economies of scale
where this is extensive market demand may not be suffieincet enough to support large number of competing firms - results in natural monoply
31
natural monopoly
start up costs- one time start up cost, marginal cost low
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network effect
value of production to each user increases as total number of users rise - can drive market toward monopoly
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x-inefficiency
occurs when firm produces output at higher cost than necessary to produce it, occrus bc of the princiipal agent problem
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principal agent problem
managers have goals conflicting with cost minimization or low worker motivation/poor supervision
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what determines price and quanity in competitive market
market s/d
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rent seeking expenditure
any acitivty designed to transfer income and wealth to particular firm/resource supplier at someone elses/society's expsne- often occurs as monoplies seek to acquire / maintain grov granted monopoly priveligest - lobbying, advertising
37
technological advnace
in LR firms can reduce cost thru new tehchnology - tehnolgical progress/dynamic inefficiency can occur in some monopolist industries but not in others, some monopolies not interest in technological progress, research can help monopoly maintain barriers to entry against new firms
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MC LOOKS SAME
ALWAYS = IN ALL THE MARKETS
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TC EQUATION
ATC X Q
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monopolist profit maximization is when
MC = MR, MR less than price, MR below D curve- monoplisits profit maximization output always below socially efficient level
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price discrimination
charging different buyers different prices for same g/s - ie senior child discount at movies, rarely reduces competition
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conditions for price discrimination
monoply power, market segregation, no resale
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monopoly power -
seller must possess some degree of mnopoly power, ability to control output and price
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market segregation -
at relativley low post to itself, seller must be able to segregate buyers into distinct classes, each of which has different willingness/ability to pay for product
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no resale
original prouchaser cant resell p/s; if buyers in low-price segment of market could easily resell product in hgihprice ie transport industry, medical services
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market segregation
separation of buyers based on difference in price elasticity of demand - consumers with elastic demand: price sensitive - responsive to price discount, consumer w/inelastic demand - not price sensitive: pay more for same good ie. discount coupons
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price discrimantion occurs in
intern trade- consumers in different countries have different elasticity of demand for products- ie airline tickets, v broadway tickets
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firms engage in pricce discrimination because it _____
enhances profit - sum of 2 profit rectangles exceeds single profit rectangluar firm would obtain from single monopoly price
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antitrust laws
when monoply power results in adverse effect upon economy, gov may choose to intervene using antirust laws if gov feels it benefits society more to have monopoly, gov will regulate it
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antitrust law examples
1890 sherman act, 1914 clayton act
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1890 sherman act
illegal to monopolize or attempt to monoplize any part of trade/commerce among the several states
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1914 clayton act
aim to prevent corporations from acquiring shares in competitior if transaction would substantially lessent competition or create a monoploy
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antitrust laws helped prevent
cartels
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