Chapter 13: Monopoly

By restricting output below the level at which marginal cost is equal to the market price....(what happens)

a monopolist increases its profit but hurts consumers.

Due to the price effect of an increase in output, the marginal revenue curve of a firm with market power always lies...

below its demand curve. So a profit-maximizing monopolist chooses the output level at which marginal cost is equal to marginal revenue—not to price.

Common techniques for price discrimination include the following:

1) Advance purchase restrictions. 2) Volume discounts. 3) Two-part tariffs

monopsonist

A monopsonist is a firm that is the sole buyer in a market.

How does a monopolist captures some of the consumer surplus as profit and cause a deadweight loss?

By reducing output and raising price above marginal cost (To avoid deadweight loss, government policy attempts to curtail monopoly behavior.)

IS THERE A MONOPOLY SUPPLY CURVE?

Nope. Given how a monopolist applies its optimal output rule, you might be tempted to ask what this implies for the supply curve of a monopolist. But this is a meaningless question: monopolists don't have supply curves. Remember that a supply 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.

Perfect price discrimination

Perfect price discrimination takes place when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay.

Price regulation

Price regulation limits the price that a monopolist is allowed to charge.

a simple visual summary of the types of market structure classified according to the two dimensions

The behavior of any given firm and the market it occupies are analyzed using one of four models of market structure—monopoly, oligopoly, perfect competition, or monopolistic competition.

When monopolies are "created" rather than natural, governments should...

act to prevent them from forming and break up existing ones

monopoly

an industry controlled by a monopolist (When a firm is a monopolist, the industry is a monopoly.) (In a monopoly, a single firm uses its market power to charge higher prices and produce less output than a competitive industry, generating profits in the short and long run.)

The crucial point about the monopolist's marginal revenue curve is that it is always _________ the demand curve.

below the demand 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.)

Price discrimination is profitable when ...

consumers differ in their sensitivity to the price. (A monopolist charges higher prices to low-elasticity consumers and lower prices to high-elasticity ones.)

The crucial difference between a firm with market power, such as a monopolist, and a firm in a perfectly competitive industry is that...

perfectly competitive firms are price-takers that face horizontal demand curves, but a firm with market power faces a downward-sloping demand curve.

the system for categorizing market structure is based on two dimensions:

(1) whether products are differentiated or identical, and (2) the number of producers in the industry—one, a few, or many.

compared with a competitive industry, a monopolist does the following three things:

1) Produces a smaller quantity: QM < QC 2) Charges a higher price: PM > PC 3) Earns a profit

What 2 things can public policy do about natural monopolies?

1) public ownership 2) regulation

an increase in production by a monopolist has two opposing effects on revenue:

1)A quantity effect. One more unit is sold, increasing total revenue by the price at which the unit is sold. 2) A price effect. In order to sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue.

five principal types of barriers to entry:

1)control of a scarce resource or input, 2) increasing returns to scale, 3) technological superiority, 4) a network externality, and 5) a government-created barrier to entry.

copyright

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

What kind of profit does a monopolist make?

A monopolist making profits will not go unnoticed by others. (Recall that this is "economic profit," revenue over and above the opportunity costs of the firm's resources.)

monopsony

A monopsony exists when there is only one buyer of a good.

natural monopoly

A natural monopoly exists when increasing returns to scale provide a large cost advantage to a single firm that produces all of an industry's output. (A natural monopoly arises when average total cost is declining over the output range relevant for the industry. This creates a barrier to entry because an established monopolist has lower average total cost than an entrant.)

network externality

A network externality exists when the value of a good or service to an individual is greater when many other people use the good or service as well. (The earliest form of network externalities arose in transportation, where the value of a road or airport increased as the number of people who had access to it rose. But network externalities are especially prevalent in the technology and communications sectors of the economy.) (in certain technology and communications sectors of the economy, a network externality enables a firm with the largest number of customers to become a monopolist.)

patent

A patent gives an inventor a temporary monopoly in the use or sale of an invention.

monopolist

A producer is a monopolist if it is the sole supplier of a good that has no close substitutes.

single-price monopolist

A single-price monopolist offers its product to all consumers at the same price.

public ownership

In public ownership of a monopoly, the good is supplied by the government or by a firm owned by the government.

price discrimination

Sellers engage in price discrimination when they charge different prices to different consumers for the same good.

barrier to entry

To earn economic profits, a monopolist must be protected by a barrier to entry—something that prevents other firms from entering the industry. (profits will not persist in the long run unless there is a barrier to entry such as control of natural resources, increasing returns to scale, technological superiority, network externalities, or legal restrictions imposed by governments.)

the monopolist produces less and sells its output at a higher price than ....

a perfectly competitive industry would. It earns profits in the short run and the long run.

The most important legally created monopolies today arise from what 2 government created barriers?

patents and copyrights (Patents and copyrights, government-created barriers, are a source of temporary monopoly that attempt to balance the need for higher prices as compensation to an inventor for the cost of invention against the increase in consumer surplus from lower prices and greater efficiency.)

In order to find the profit-maximizing quantity of output for a monopolist, you look for the...

point where the marginal revenue curve crosses the marginal cost curve. (MR=MC)

What is unforuntatly related to public ownership?

publicly owned companies are often poorly run.

Market power

the ability of a firm to raise prices. (And market power is what monopoly is all about.)

What creates the wedge between the monopolist's marginal revenue curve and the demand curve?

the price effect (in order to sell an additional diamond, De Beers must cut the market price on all units sold.) ((In fact, this wedge exists for any firm that possesses market power, such as an oligopolist as well as a monopolist. Having market power means that the firm faces a downward-sloping demand curve. As a result, there will always be a price effect from an increase in its output. So for a firm with market power, the marginal revenue curve always lies below its demand curve.))