chapter 15 monopoly

three sources of barriers to entry

1. monopoly resources 2. government created monopolies 3. natural monopolies

two effects on total revenue when monopolist firm sells an additional unit

1. output effect 2. price effect

four ways policymakers can respond to monopolies

1. tying to make monopolized industries more competitive 2. by regulating the behavior of the monopolies 3. by turning some private monopolies into public enterprises 4. by doing nothing at all

monopoly

A firm that is the sole seller of a product without any close substitutes

perfect price discrimination

A situation in which the monopolist is able to charge each customer precisely his willingness to pay

natural monopoly

A type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

What is a barrier to entry? What are the three sources of barriers to entry that allow a monopoly to remain the sole seller in a market?

Anything that restricts new firms from entering a market. A key resource is owned by a single firm, the government gives a single firm the exclusive right to produce a good, or the costs of production make a single producer more efficient than a large number of producers.

Should antitrust laws be utilized to stop all mergers? Why or why not?

No, many mergers capture synergies between the merging firms that reduce costs and increase efficiency.

Does a monopolist charge the highest possible price for its output? Why or why not? How does a monopolist choose the price it will charge for its product?

No. Even a monopolist is subject to the demand for its product, so a high price would cause buyers to buy very little of the good. The monopolist chooses its price by first choosing the optimal quantity based on the intersection of MR and MC and then charging the price consistent with that quantity.

relationship between MR MC P in monopolized markets

P > MR = MC

price effect

P is lower : decrease total revenue

output effect

Q is higher: increase total revenue

profit equation for monopolist firm

TR - TC rewritten as.... (P - ATC) x Q

price discrimination

The business practice of selling the same good at different prices to different customers

What is the necessary condition for a monopolist to be able to price discriminate?

The monopolist must be able to separate buyers according to their willingness to pay

arbitrage

The process of buying a good in one market at a low price and selling it in another market at a higher price

Is perfect price discrimination efficient? Explain. Who receives the surplus?

Yes, because every unit is produced where the value to buyers is greater than or equal to the cost to the producer. However, the entire total surplus is received by the producer (the monopolist).

under what circumstances can price discrimination take place

a firm with market power such as a monpolist

monopoly resources

a key resources required for production is owned by a single firm

price discrimination is a rational strategy for profit-maximizing monopolist because....

a monopolist's profits are increased when it charges each customer a price closer to their individual willingness to pay

natural monoplies

a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

name a type of law that is employed that is aimed at reducing monopoly power

antitrust laws

why is a monopolist firm's demand curve downward sloping?

because it is the sole producer in the market

why could price discrimination raise economic welfare

because output increases beyond that which would result under monopoly pricing

how do monopolists separate their customers according to their willingness to pay

by age, income, location, etc

the monopolist cannot choose both a high price and a large quantity if that combination does not lie on the ________ facing the monopolist

demand curve

what does a monopolist firm's demand curve look like?

downward sloping

why do would firms not want to enter the market if there is a natural monopolist present?

each firm that enters knows they can't achieve the same low costs that the monopolist enjoys because after entry, each firm would have a smaller piece of the market

price discrimination can raise _____

economic welfare

one reason why government created monopolies could be a good thing

increases incentives for creative activity

does a monopolist firm produce more or less than the socially efficient Q of output?

less

monopolists are price...

makers

monopolists charge prices that exceed....

marginal costs

the intersection of __ and __ determine profit maximizing quantity

marginal revenue and marginal cost

monopolist firm's relationship between marginal revenue and the price of its good

marginal revenue is less than the price of its good

what is one problem that comes with regulating prices for monpolies

monopolists have no incentive to reduce costs because their prices are reduced when their costs are reduced

examples of price discrimination

movie tickets, airline prices, discount coupons, financial aid for college tuition, quantity discounts

when the price effect on revenue is greater than the output effect, marginal revenue is ____

negative

if there is arbitrage, is a firm able to price discriminate?

no

in reality, can perfect price discrimination be accomplished?

no

do monopolies often form because of monopoly resources?

no ; quite rare

is there deadweight loss in perfect price discrimination

no ; the efficient quantity is produced and consumed

two things that can cause government created monopolies?

patents and copyright laws

what does a competitive market firm's demand curve look like?

perfect elastic (horizontal line)

what do antitrust laws do

prevent mergers that reduce competition, break up extremely large companies to increase competition, and prevent companies from colluding

how can the government regulate the behavior of monopolies

regulate prices, subsidize with tax revenue, allow average total-cost pricing

price discrimination is only possible if the monopolist is able to....

separate customers according to their willingness to pay

the _____ of the market can determine if an industry is a natural monopoly

size

why is there no supply curve for monopolist markets

supply curve tells us the quantity that firms choose to supply at any given price but a monopoly firm is a price maker because it sets the price at the same time it chooses the quantity to supply

what is the social cost of a monopoly?

the deadweight loss generated when the monopolist produces a quantity of output below that which is efficient

government created monopolies

the government gives a single firm the exclusive right to produce some good or service

the monopolist firm's demand curve is the same as ....

the market demand curve

example of a monopoly that changed to a government ran enterprise

the postal service

monopolists can alter the price of its goods by adjusting what

the quantity it supplies the market

common examples of natural monopolies

utilities like water and electricity distribution

what is the socially efficient point on a monopolist graph w all the curves

where the demand curve and MC curve intersect

does a monopolist produce a deadweight loss? why?

yes ; at the high monopoly price, consumers fail to buy units of output where the value to them exceeds the cost to the monopolist