monoply

• A monopoly is the only seller of a good or service that does not have a close substitute
• Because there is only one firm, the firm’s demand curve is the same as the market demand curve
• barriers to entry:

  1. Economies of Scale
  2. Ownership of a resource
  3. Government Regulations
• natural monoply: If the minimum efficient scale occurs at a level of output that is larger than the quantity demanded by consumers, a single firm supplying the entire market can produce at a lower cost than multiple smaller firms
• The government may also grant a public franchise which gives a firm the sole right to provide a good or service. In some cases, the government may grant this franchise to itself and establish a state-owned enterprise (SOE) or crown corporation
• for a monopoly firm: P > MC
• monopolies have price markups
• The price markup is even larger in a monopoly than in monopolistic competition or oligopoly, so the deadweight loss in a monopoly will also be larger than in any situation with any amount of competition.
• Monopolies typically earn an economic profit, which is also called a monopoly rent
• The profit maximizing quantity is usually not the minimum efficient scale
• Monopolies generally do not achieve production efficiency
• The monopoly can earn positive economic profits over the long-run because other firms cannot enter the market. Since P ≠ ATC investment capital is not allocated efficiently
• When two competing firms in the same industry merge it is called horizontal integration
• Because monopolies and oligopolies can charge high markups and make consumers worse off, governments regularly intervene in these markets
• Governments can charge a licensing fee which strips away some of the economic profit. A licensing fee is a fixed cost – so it changes ATC but not MC.
• Sometimes, governments will impose price ceilings on oligopoly and monopoly firms. A price ceiling actually makes MR = P because the firm cannot raise its price. CS increases and market is more efficient
• In situations of natural monopoly, the government may decide to create a non-profit-maximizing state-owned enterprise. The government will set price equal to average total cost
• federally regulated industries: rail, air travel, telecommunications, banking and lending services
• provincially regulated industries: electricity, natural gas, water, public transit, colleges and unviersities
• Price discrimination is the act of charging different prices to different customers for the same good or service. It is a legal business practice
• multi-market (3rd degree) price discrimination: charge different prices to different market segments, segmented by geography, age, student status, etc. Output will be higher and producer surplus larger
• quantity based (2nd degree) price discrimination: offer bulk discounts, ppl wanting to buy small amounts pay more
• perfect price discrimination (1st degree): charge each consumer their exact willingness to pay
• With a two-part tariff, the firm charges a membership or entrance fee as well as a fee for use
• With a “junk fee”, the firm charges a processing fee or administrative charge in addition to the stated price
• low price guarantees are good for firm reputation and profits
• LPGs can enforce collusion in markets with strong price competition (if your rival lowers its price, you will match them and vice versa so there isno benefit to lowering price).
• A loss leader is an item sold below cost and typically advertised as being on sale. It guarantees the seller will make a loss on this item but also ensures that rivals will not have the same price initially. Rivals may be unwilling to match this price as it guarantees a loss