Microeconomics-Chapter 13-Monopoly

monopolist

Compared with a competitive industry, a _______________ does the following:Produces a smaller quantity: QM < QC. Charges a higher price: PM > PC. Earns a profit. (392)

monopsony

a market in which there is only one buyer but many sellers. (399)

single-price monopolist

a monopolist that offers its product to all consumers at the same price. (401)

monopoly

an industry controlled by a monopolist (381)

public ownership

In many countries, the preferred answer to the problem of natural monopoly has been ___________ _____________. Instead of allowing a private monopolist to control an industry, the government establishes a public agency to provide the good and protect consumers' interests. (397)

profit-maximizing quantity of output

In order to find the ___________ ____________ _______ __ _________ for a monopolist, you look for the point where the marginal revenue curve crosses the marginal cost curve. (391)

regulation/price regulation

In the United States, the more common answer to natural monopolies has been to leave the industry in private hands but subject it to _____________. In particular, most local utilities like electricity, land line telephone service, natural gas, and so on are covered by ___________ _________that limits the prices they can charge.

monopolist

A producer is a ________________ if it is the sole supplier of a good that has no close substitutes. (381)

Patent/Patents

A __________ gives an inventor the sole right to make, use, or sell that invention for a period that in most countries lasts between 16 and 20 years. _________ are given to the creators of new products, such as drugs or devices. (385)

natural monopoly

A ______________ __________ can arise when fixed costs required to operate are very high. When this occurs, the firm's ATC curve declines over the range of output at which price is greater than or equal to average total cost. (383)

monopolist/downward/downward

A ______________, in contrast, is the sole supplier of its good. So its demand curve is simply the market demand curve, which slopes _____________. This _______________ slope creates a wedge between the price of the good and the marginal revenue of the good—the change in revenue generated by producing one more unit. (387)

perfectly competitive industry/monopolist

A ________________ ______________ __________ can have profits in the short run but not in the long run. In the short run, price can exceed average total cost, allowing a perfectly competitive firm to make a profit. But we also know that this cannot persist. In contrast, barriers to entry allow a __________________ to make profits in both the short run and the long run.(393)

perfect price discrimination/perfectly price-discriminating

a monopolist that can engage in ________________ _____________ _________ doesn't cause any inefficiency! The reason is that the source of inefficiency is eliminated: all potential consumers who are willing to purchase the good at a price equal to or above marginal cost are able to do so. The _____________ _____________ ____________ monopolist manages to scoop up all consumers by offering some of them lower prices than it charges others. (404)

market power

for a firm with __________ _________, the marginal revenue curve always lies below its demand curve. (389)

technological advantage/technological superiority

A firm that maintains a consistent _______________ ___________ over potential competitors can establish itself as a monopolist. For example, from the 1970s through the 1990s the chip manufacturer Intel was able to maintain a consistent advantage over potential competitors in both the design and production of microprocessors, the chips that run computers. But _____________ _____________ is typically not a barrier to entry over the longer term: over time competitors will invest in upgrading their technology to match that of the technology leader. (383)

perfectly competitive

A market will be _____________ ___________ only if there are many producers, all of whom produce the same good. (381)

Controls a Scarce Resource or Input

A monopolist that ___________ __ ___________ ____________ ___ __________crucial to an industry can prevent other firms from entering its market. Cecil Rhodes created the De Beers monopoly by establishing control over the mines that produced the great bulk of the world's diamonds. (382)

natural monopoly/natural monopoly

A monopoly created and sustained by increasing returns to scale is called a ____________ __________. The defining characteristic of a ____________ ___________ is that it possesses increasing returns to scale over the range of output that is relevant for the industry. (383)

optimal output rule

A price-taking firm's ___________ ________ ________ is to produce the output level at which the marginal cost of the last unit produced is equal to the market price. (387)

price discrimination

Although providing cheap patent-protected drugs to patients in poor countries is a new phenomenon, charging different prices to consumers in different countries is not: it's an example of ______________ _____________. A monopolist will maximize profits by charging a higher price in the country with a lower price elasticity (the rich country) and a lower price in the country with a higher price elasticity (the poor country). Interestingly, however, drug prices can differ substantially even among countries with comparable income levels. How do we explain this? The answer is differences in regulation. (386)

perfectly competitive industry

Any attempt by an individual firm in a _____________ ___________ ___________ to charge more than the going market price will cause it to lose all its sales. It can, however, sell as much as it likes at the market price. (387)

monopolist/monopolist

At low levels of output, the quantity effect is stronger than the price effect: as the __________________ sells more, it has to lower the price on only very few units, so the price effect is small. As output rises beyond 10 diamonds, total revenue actually falls. This reflects the fact that at high levels of output, the price effect is stronger than the quantity effect: as the ________________ sells more, it now has to lower the price on many units of output, making the price effect very large. (389)

natural monopoly

At times the cure is worse than the disease. Some economists have argued that the best solution, even in the case of_______________ ______________, may be to live with it. The case for doing nothing is that attempts to control monopoly will, one way or another, do more harm than good—for example, by the politicization of pricing, which leads to shortages, or by the creation of opportunities for political corruption. (399)

natural/natural/natural

Breaking up a monopoly that isn't _____________ is clearly a good idea: the gains to consumers outweigh the loss to the producer. But it's not so clear whether a _____________ monopoly, one in which a large producer has lower average total costs than small producers, should be broken up, because this would raise average total cost.For example, a town government that tried to prevent a single company from dominating local gas supply—which, as we've discussed, is almost surely a ____________ monopoly—would raise the cost of providing gas to its residents.. (396)

output

By restricting ________ below the level at which marginal cost is equal to the market price, a monopolist increases its profit but hurts consumers. To assess whether this is a net benefit or loss to society, we must compare the monopolist's gain in profit to the loss in consumer surplus. And what we learn is that the loss in consumer surplus is larger than the monopolist's gain. Monopoly causes a net loss for society. (395)

sensitivity to price

Consumers differ in their _____________ _____ ___________—that a high price has a larger effect in discouraging purchases by students than by business travelers. As long as different groups of customers respond differently to the price, a monopolist will find that it can capture more consumer surplus and increase its profit by charging them different prices. (402)

natural monopoly

Experience suggests, however, that public ownership as a solution to the problem of ____________ ___________ often works badly in practice. One reason is that publicly owned firms are often less eager than private companies to keep costs down or offer high-quality products. Another is that publicly owned companies all too often end up serving political interests—providing contracts or jobs to people with the right connections. For example, Amtrak has notoriously provided train service at a loss to destinations that attract few passengers—but that are located in the districts of influential members of Congress. (397)

network externality

If you were the only person in the world with an internet connection, what would that connection be worth to you? The answer, of course, is nothing. Your internet connection is valuable only because other people are also connected. And, in general, the more people who are connected, the more valuable your connection is. This phenomenon, whereby the value of a good or service to an individual is greater when many others use the same good or service, is called a _____________ ___________—its value derives from enabling its users to participate in a network of other users. (384)

perfect competition

In ____________ __________ many producers each sell an identical product. (380)

monopolistic competition

In ____________ ____________, many producers each sell a differentiated product (think of producers of economics textbooks). (380)

oligopoly

In ______________, a few producers—more than one but not a large number—sell products that may be either identical or differentiated. (380)

market demand curve

In addition to the optimal output rule, recall that even though the _____________ ________ ______ always slopes downward, each of the firms that make up a perfectly competitive industry faces a perfectly elastic demand curve that is horizontal at the market price. (387)

perfect price discrimination.

In general, the greater the number of different prices a monopolist is able to charge, the closer it can get to _____________ ________________ _____________. (404)

output/prices

It's good to be a monopolist, but it's not so good to be a monopolist's customer. A monopolist, by reducing ___________ and raising __________, benefits at the expense of consumers. (394)

monopsonist

Like a monopolist, a __________________ will distort the competitive market outcome in order to capture more of the surplus, except that the monopsonist will do this through quantity purchased and price paid for goods rather than through quantity sold and price charged for goods. (399)

increasing returns to scale

Many Americans have natural gas piped into their homes, for cooking and heating. Invariably, the local gas company is a monopolist. But why don't rival companies compete to provide gas? Local gas supply is an industry in which average total cost falls as output increases. As we learned in Chapter 11, this phenomenon is called __________ _______ ___ _________: when average total cost falls as output increases, firms tend to grow larger. (383)

Volume discounts

Often the price is lower if you buy a large quantity. For a consumer who plans to consume a lot of a good, the cost of the last unit—the marginal cost to the consumer—is considerably less than the average price. This separates those who plan to buy a lot and so are likely to be more sensitive to price from those who don't.. (405)

profit-maximizing quantity of output

P = MC at the perfectly competitive firm's ______________ ____________ ___________ _____ ___________. (391)

profit-maximizing quantity of output

P > MR = MC at the monopolist's ___________ ____________ __________ _______ _____________. (391)

market structure

Perfect competition and monopoly are particular types of ____________ __________. They are specific categories in a system economists use to classify markets and industries according to two main dimensions. (379)

natural/natural

Policy toward monopoly depends crucially on whether or not the industry in question is a _____________ monopoly, one in which increasing returns to scale ensure that a bigger producer has lower average total cost. If the industry is not a _____________ monopoly, the best policy is to prevent monopoly from arising or break it up if it already exists. (396)

Advance purchase restrictions

Prices are lower for those who purchase well in advance (or in some cases for those who purchase at the last minute). This separates those who are likely to shop for better prices from those who won't. (405)

supply

Remember that a __________ curve shows the quantity that producers are willing to supply for any given market price. A monopolist, however, does not take the price as given; it chooses a profit-maximizing quantity, taking into account its own ability to influence the price. (392)

natural monopolist

So the _____________ __________ has increasing returns to scale over the entire range of output for which any firm would want to remain in the industry—the range of output at which the firm would at least break even in the long run. The source of this condition is large fixed costs: when large fixed costs are required to operate, a given quantity of output is produced at lower average total cost by one large firm than by two or more smaller firms. (383)

greater

The __________ the number of prices the monopolist charges, the more money it extracts from consumers.(404)

greater

The ______________ the number of prices the monopolist charges, the lower the lowest price—that is, some consumers will pay prices that approach marginal cost. (404)

market power/market power

The ability of a monopolist to raise its price above the competitive level by reducing output is known as _____________ __________. And ___________ _________ is what monopoly is all about.(381)

public ownership

The advantage of ____________ _________, in principle, is that a publicly owned natural monopoly can set prices based on the criterion of efficiency rather than profit maximization. In a perfectly competitive industry, profit-maximizing behavior is efficient, because producers produce the quantity at which price is equal to marginal cost; that is why there is no economic argument for public ownership of, say, wheat farms. (397)

demand

The crucial point about the monopolist's marginal revenue curve is that it is always below the ___________ curve. That's because of the price effect: a monopolist's marginal revenue from selling an additional unit is always less than the price the monopolist receives for the previous unit. (388)

antitrust policies

The government policies used to prevent or eliminate monopolies are known as ______________ _____________. (396)

patents/copyrights/patents

The justification for _____________ and ___________ is a matter of incentives. If inventors are not protected by _____________, they would gain little reward from their efforts: as soon as a valuable invention was made public, others would copy it and sell products based on it. And if inventors could not expect to profit from their inventions, then there would be no incentive to incur the costs of invention in the first place. (385)

monopolies

The most important legally created ________________ today arise from patents and copyrights. (385)

natural monopolies/natural monopolies

The most visible _____________ ________________ in the modern economy are local utilities—water, gas, and sometimes electricity. As we'll see, _______________ __________ pose a special challenge to public policy. (383)

government-created barriers.

The pharmaceutical company Merck introduced Propecia, a drug effective against baldness, in 1998. Although Propecia was very profitable and other drug companies had the know-how to produce it, no other firms challenged Merck's monopoly because the U.S. government had given Merck the sole legal right to produce the drug in the United States. Propecia is an example of a monopoly protected by ______________ _____________ ___________. (385).

monopolist/increase

The reason a ______________ reduces output and raises price compared to the perfectly competitive industry levels is to ___________ profit. (382)

market structures

The system of ____________ _________ is based on two dimensions: 1) The number of producers in the market (one, few, or many). 2) Whether the goods offered are identical or differentiated.(380)

monopoly price

To find the ____________ ______, you have to go up vertically from A to the demand curve. There you find the price at which consumers demand the profit-maximizing quantity. So the profit-maximizing price-quantity combination is always a point on the demand curve. (391)

monopolist

To maximize profit, the ______________ compares marginal cost with marginal revenue. If marginal revenue exceeds marginal cost, De Beers increases profit by producing more; if marginal revenue is less than marginal cost, De Beers increases profit by producing less. So the monopolist maximizes its profit by using the optimal output rule: (390)

perfect competition/monopolist

Under _____________ ____________ economic profits normally vanish in the long run as competitors enter the market. Under monopoly the profits don't go away—a __________ is able to continue earning economic profits in the long run. (382)

perfect competition, monopoly, oligopoly, and monopolistic competition

What are the four principal models of market structure? (380)

network externality

When a _____________ ____________exists, the firm with the largest network of customers using its product has an advantage in attracting new customers, one that may allow it to become a monopolist. At a minimum, the dominant firm can charge a higher price and so earn higher profits than competitors. (384)

economic signals

When prices work as ______________ __________, they convey the information needed to ensure that all mutually beneficial transactions will indeed occur: the market price signals the seller's cost, and a consumer signals willingness to pay by purchasing the good whenever that willingness to pay is at least as high as the market price. (405)

Two-part tariffs.

With a ______ ________ _____________, a customer pays a flat fee upfront and then a per-unit fee on each item purchased. So in a discount club like Sam's Club (which is not a monopolist but a monopolistic competitor), you pay an annual fee in addition to the cost of the items you purchase. So the cost of the first item you buy is in effect much higher than that of subsequent items, making the two-part tariff behave like a volume discount. (406)

Differentiated goods

_____________ _________ are goods that are different but considered somewhat substitutable by consumers (think Coke versus Pepsi).(380)

price discrimination

______________ _____________ takes place under oligopoly and monopolistic competition as well as monopoly. But it doesn't happen under perfect competition. (401)

Oligopoly/oligopolies

_______________, a market structure in which there is a small number of large producers, are much more common than monopolies. In fact, most of the goods you buy, from cars to airline tickets, are supplied by _________________. (381)

Monopsony/monopsonist

________________, although it does exist, is rarer than monopoly. The classic example is a single employer in a small town—say, the local factory—that is purchasing labor services from workers. Recall that a monopolist, realizing that it can affect the price at which its goods are sold, reduces output in order to get a higher price and increase its profits. A __________________ does much the same thing. But with a twist: realizing that it can affect the wage it pays its employees by moving down the labor supply curve, it reduces the number of employees hired to pay a lower wage and increase its profits. (399)

profit-maximizing firm

a _____________ _________ _______ produces the quantity of output at which the marginal cost of producing the last unit of output equals marginal revenue—the change in total revenue generated by that last unit of output. That is, MR = MC at the profit-maximizing quantity of output. (387)

price ceiling/price ceiling

a _____________ ___________ on a monopolist need not create a shortage—in the absence of a _____________ __________, a monopolist would charge a price that is higher than its marginal cost of production. So even if forced to charge a lower price—as long as that price is above MC and the monopolist at least breaks even on total output—the monopolist still has an incentive to produce the quantity demanded at that price. (397)

copyright

a ______________ gives the creator of a literary or artistic work the sole rights to profit from that work, usually for a period equal to the creator's lifetime plus 70 years. (385)

quantity effect/price effect

an increase in production by a monopolist has two opposing effects on revenue:A _____________ ________. One more unit is sold, increasing total revenue by the price at which the unit is sold.A ____________ __________. In order to sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue. (388)

monopoly

by driving a wedge between price and marginal cost, _____________ acts much like a tax on consumers and produces the same kind of inefficiency. (396)

deadweight losses/

government policies on monopoly typically focus on preventing ______________ ____________, not preventing price discrimination—unless it causes serious issues of equity. Compared to a single-price monopolist, price discrimination—even when it is not perfect—can increase the efficiency of the market.If sales to consumers formerly priced out of the market but now able to purchase the good at a lower price generate enough surplus to offset the loss in surplus to those now facing a higher price and no longer buying the good, then total surplus increases when price discrimination is introduced. (406)

price discrimination

many if not most monopolists find that they can increase their profits by charging different customers different prices for the same good: they engage in ______________ ______________. (401)

Advance purchase restrictions/Volume discounts/Two-part tariffs

monopolists do try to move in the direction of perfect price discrimination through a variety of pricing strategies. Common techniques for price discrimination include the following:(405)

supply

monopolists don't have ___________ curves. (392)

monopsonists

physicians have often complained that in some parts of the country where most patients are insured by one or two insurance companies, the companies act as _________________ in setting the reimbursements rates they pay for medical procedures. (399)

barrier to entry/ barrier to entry.

something that prevents other firms from entering an industry. Crucial in protecting the profits of a monopolist. There are five types of ______________ ______ __________: control over scarce resources or inputs, increasing returns to scale, technological superiority, network externalities, and government-created barriers. (382)

perfect price discrimination

the price discrimination that results when a monopolist charges each consumer the maximum that the consumer is willing to pay. a monopolist is able to capture the entire surplus. (404)

regulatory capture

there is always the danger of what is called ______________ ______________: because vast sums of money are at stake, regulators can be unduly influenced by the companies they are supposed to oversee. (399)

monopoly/monopsony

when the two largest cable providers, Time Warner Cable and Comcast, announced their intention to merge, questions of monopoly and monopsony arose: _____________, because the combined company would cover 30 million subscribers, an overwhelming proportion of Americans with cable access; and ________________ because the combined company would be virtually the only purchaser of programming by companies that produce shows for broadcast (399).

price regulation

with ______________ ____________, the monopolist produces more, at a lower price.(397)

monopoly

In ___________,a single producer sells a single, undifferentiated product. (380)