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Economics > Week 3: Monopoly, monopolistic competition, oligopoly and government Intervention > Flashcards

Week 3: Monopoly, monopolistic competition, oligopoly and government Intervention Flashcards

1
Q

Six characteristics of monopoly

A
  1. high barriers to enter market, no close substitutes
  2. only one firm
  3. sold quantity can only increase if price is lowered
  4. price is higher than marginal revenue
  5. demand curve is average revenue curve
  6. is able to manipulate the price
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2
Q

Four consequences of monopoly

A
  1. results in high prices
  2. results in low quantities sold
  3. results in high monopoly profits
  4. results in a total welfare loss (deadweight loss) as profits increase less than consumer surplus falls
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3
Q

Definintion price discrimination

A

Charging different prices for different groups of customers

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4
Q

Three conditions of price discrimination

A
  1. It must be possible to distinguish the different groups clearly
  2. both groups cannot trade the product with each other
  3. elasticity of demand strongly differs for the different groups
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5
Q

Seven assumptions/characteristics of monopolistic competition

A
  1. many suppliers, many buyers and a heterogeneous differentiated product
  2. Market behaviour of 1 firm does not have any influence on the market
  3. the goal of firms is maximizing profit
  4. firms have more or less identical cost structures (identical cost curves)
  5. firms are able to manipulate their price
  6. in the long run there are no barriers to entry or exit of firms
  7. firms compete on product quality, price and marketing
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6
Q

Differences between monopoly and monopolistic competition

A

#

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7
Q

Four characteristics of oligopoly

A
  1. only a limited number of firms are active
  2. If there are only two firms: duopoly
  3. usually some barriers to entry, or some economies of scale
  4. profits not only depend on the decisions (price) of the firm but also on the decisions of its competitors
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8
Q

Game theory & its strategy for profit maximalisation

A

Oligopolistic model. Whatever strategy the competitor chooses, it will be most attractive to spend a lot on advertising

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9
Q

Cartel and its profit maximalisation

A

Oligopolistic model, however cartel works as a monopoly as it uses monopolistic pricing.

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10
Q

Monopolistic pricing

A

Pricing strategy followed by a seller whereby the seller prices a product to maximize his or her profits under the assumption that he or she does not need to worry about competition.
Remember: price above marginal revenue; demand curve is average total revenue curve and a higher quantity can only be sold when price decreases

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11
Q

The five problems of cartels

A
  1. with too many firms it is difficult to make arrangements
  2. free-rider problem, participants have an incentive to cheat and to produce too much
  3. high prices and high profits attracts competitors
  4. for an individual firm it is attractive to remain outside cartel (freedom to decide how much to produce and sell it at a self-designed price)
  5. cartels and collusion to manipulate prices are prohibited
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12
Q

Five main micro-economic government measures

A
  1. price floors/ price guarantees
  2. subsidies on production
  3. taxation
  4. price ceilings/ price support
  5. quota
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13
Q

Price floors/ price guarantees & consequences

A

minimum prices. Often combined with the government buying the overproduction at a set price.

  • Leads to overproduction, extra costs on the government (that will sell it for a low price on the world market)
  • Leads to deadweight loss as it blocks certain transactions
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14
Q

Quota and consequences

A

maximum production to create higher prices and protect producers.
When set lower than q equilibrium, will lead to deadweight loss

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15
Q

Price ceiling/ maximum price: aim and consequence

A

protecting consumers for high prices

welfare loss, less quantity offered

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16
Q

Subsidy consequences

A
  • Higher quantity; lower prices and higher MC
  • Welfare loss
  • Increase in consumer and producer surplus due to the cost of subsidy being higher than the welfare gain
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17
Q

Societal welfare and Pareto

A

Societal welfare is at its maximum if no potential Pareto improvement is possible
Potential Pareto improvement is seen as a rise in welfare

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18
Q

Potential Pareto improvement

A

An improvement to a system when a change in the allocation of goods harms no one and benefits at least one person.

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19
Q

Seven reasons for government intervention justifies by economic theory

A
  1. protection of property rights
  2. public goods
  3. semi-public goods (cost of collection high)
  4. merit and demerit goods
  5. redistribution of income
  6. fighting unemployment
  7. monopoly pricing and cartels (as it generates welfare loss)
  8. taxation
  9. positive and negative external effects
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20
Q

Three types of monopolies

A
  1. legal monopoly: patents to stimulate innovation
  2. cartel: oligopolistic firms working together
  3. natural monopoly (high fixed costs or only one place where a natural resource can be found)
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21
Q

Four characteristics of natural monopoly

A
  1. TFC are huge
  2. ATC will diminish at high production
  3. MC of extra production is low
  4. to have one firm is economically the most efficient (having the lowest average costs)
22
Q

Taxation and elasticities

A

The more inelastic the demand, the higher the share in the tax that consumers have to pay (huge price increase)
The more inelastic the supply, the higher the share in the tax the producers have to pay (limited price increase)
The more inelastic demand or supply, the higher the
tax revenue as the quantity sold hardly diminish

23
Q

negative externalities

A

A cost that is suffered by a third party as a consequence of an economic transaction.
Without intervention lower price and higher quantity than with governmental intervention.
-> MSC is higher than MC, leading to a welfare loss

24
Q

Four solutions to negative external effects

A
  1. government intervention creates a welfare optimum, which eliminates the deadweight loss. Government regulation and quotas (to mandate clean technology)
  2. Coase theorem: allocate property rights to one of the parties involved. problem: high transaction costs of negotiations
  3. taxation of polluting production or taxation of pollution directly
  4. Marketable/ tradable permits; cap-and-trade. Advantage: you can control the total pollution in an efficient way. Problem: government needs to know firms’ production costs
25
Q

Coase theorem

A

allocate property rights to one of the parties involved. Problem: high transaction costs of negotiations

26
Q

merit goods

A

The government thinks that the consumption of certain products have very positive effects, where people themselves are not aware of.
Also people do not take the long term beneficial effects enough into account

27
Q

demerit goods

A

The government thinks that people are not aware of the disadvantages of consuming certain products.
Also, people do not take the long term negative effects enough into account.

28
Q

Four characteristics of perfect competition

A
  1. large number of firms
  2. produce at lowest cost possible
  3. make zero profit in long run
  4. firms are efficient
29
Q

Large number of firms implies

A
  1. small market share
  2. ignore other firms
  3. Collusion is impossible
30
Q

Maximum profit according to cost and revenue functions

A

maximum profit is where MC equals MR

31
Q

Two differences between monopolistic competition and perfect competition

A
  1. excess capacity in monopolistic competition, whereas it doesn’t exist in perfect competition (due to ATC being at its lowest)
  2. markup exist in monopolistic competition but not in perfect competition.

Markup is the price that exceeds marginal cost
in perfect competition, the price equals marginal cost

32
Q

Efficient degree of product variety

A

Marginal Social Benefit = Marginal Social Cost

33
Q

Consequences of small number of firms in the market

A

interdependence: each firm’s actions influence profits of all other firms
temptation to cooperate: cartel would limit output, whereas price and economic profit would increase

34
Q

Two theories on regulation

A

Social interest theory: political and regulatory process relentlessly seek out inefficiencies and introduce regulation eliminating deadweight loss and allocate resources efficiently

Capture theory: regulation serves self-interest of producer who captures the regulator and maximises economic profit

35
Q

Marginal cost pricing rule

A

regulation for monopoly
rule setting price equal to marginal cost (no mark up)
Reaction company to cover ATC: two-part tariff: one-time connection fee, plans at fixed prices with afterwards free access

36
Q

average cost pricing

A

regulation for monopoly

price equals ATC: creates deadweight loss

37
Q

government subsidy in regulation

A

Monopoly regulation

direct payment to firm equal to its economic loss: taxes create deadweight loss

38
Q

Three regulations for monopoly

A
  1. marginal cost pricing rule
  2. average cost pricing rule
  3. government subsidy
39
Q

antitrust law

A

regulates oligopolies preventing them from becoming monopolies or behaving like them.
Synonym: competition and monopoly law

40
Q

three main methods of intervention in market for farmers products

A
  1. quota: upper limit to the q of a good that may be produced, decrease in s, rise in p, decrease in MC, inefficient underproduction, incentive to cheat and overproduce
  2. production subsidy: increase in t, fall in p and rise in q, increase MC, inefficient overproduction
  3. price support: rise in p, increase in MC, inefficient overproduction
41
Q

Fourfold classification of goods

A

private goods: excludable and rival
public goods: non-excludable and non-rival
common ressources: non-excludable and rival
natural monopoly good: non-rival and excludable

42
Q

Tragedy of commons

A

problem for common ressources where overconsumption and underinvestment lead to depletion of a common ressource

43
Q

Rational ignorance

A

it’s rational for a voter to be ignorant about an issue unless that issue has a perceptible effect on voter’s economic welfare

44
Q

Positive externalities

A

biggest two mixed goods: education and healthcare

social benefits exceed private benefit

45
Q

Marginal Social Benefit

A

MSB= MB + marginal external benefit
marginal benefit enjoyed by society
Demand is MSB

46
Q

marginal external benefit

A

benefit from an additional unit of a good or a service that people other than its consumer enjoy

47
Q

Tax incidence & factors it is dependent on

A

division of burden of a tax between buyers and sellers

elasticity of supply and demand
elastic supply: sellers pay tax
elastic demand: buyers pay tax
inelastic supply: buyers pay
inelastic demand: sellers pay
48
Q

When is tax efficient?

A

when there is no deadweight loss, meaning that in perfectly inelastic demand and supply situations, q bought and sold doesn’t change.
-> no deadweight loss

49
Q

Two principles of fairness for a tax system

A

benefits principle: people should pay taxes equal to benefits they receive from services provided by government
ability-to-pay principle: people should pay taxes according to how easily they can bear burden of tax

50
Q

Pigovian tax

A

incentivize producers to cut back on pollution

setting tax rate equal to marginal external cost

Economics (8 decks)

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