unit 4 micro

• Characteristics of a Monopoly :

  • Single seller
  • No close substitutes
  • Price Maker
  • Blocked Entry(Barriers of Entry)
  • Non-Price Competition
• Single seller : sole producer of specific goods/ service
• No close substitutes : product is unique, if consumers don’t buy it from the firm they must do without it
• Price Maker : Controls Quantity supply thus considerable control over price(not total). Downward sloping demand
• Blocked Entry(Barriers of Entry) : No immediate competitors exist because barriers keep potential firms from entering industry
• Non-Price Competition : Engages in advertising for public relations and to expose benefits
• Barriers of Entry for a monopoly : Economics of Scale - If a new firm tries to enter industry, monopolist can simply plummet (drop) prices. They can afford to do that in the short term because in the long run they can buy everything in bulk(resources/ATC are low)
• Government for a monopoly:

  • Patents - a company may have intellectual property rights for 10-20 years
  • Licenses
  • Grant sole production rights - natural gas/ electricity/ water
  • Ownership/ control of resources - monopoly firm has sole access
  • Rival sport leagues, diamond mines
• Firms aren’t productive in efficiencies, causing Deadweight loss
• Price Discrimination : when a monopolist increases their profits by selling the same good to different customers for different prices
• 1st degree(perfect) price discrimination : firm charges a different price to every costumer, above cost
• consumer surplus = 0 , becoming monopolies profit
• when the monopolist engages in perfect price discrimination -> allocative efficiency is earned ( P = MC)
• Characteristics of a monopolistic competition :

  1. 15-100 number of sellers
  2. Differentiated Products
  3. Easy Entry and Exit
• Demand curve in monopoly competition :

  1. More elastic than the monopolist because seller has many competitors producing closely substitutable goods
  2. Less elastic than perfect competition because fewer rivals and products are differentiated
• Characteristics of a Oligopoly :

  1. Dominated by a few large firms
  2. Collusive vs. Competitive Oligopolies(Sometimes there’s price leadership)
  3. High barriers of entry -> Mergers : companies that merge with other companies to make more profits
  4. Product can be homogenous or differentiated
• Collusion : firms work together to limit competition and drive up prices
• cartels : strongest form of collusion but also unstable because incentive to cheat too high
• Mutual Interdependence : firms must consider actions of their competitors before making decisions
• Price Leadership : one dominant firm sets the prices and other follow suit
• High Barriers of Entry : high start up costs make it difficult to enter the market
• Game Theory :

  • Dominant Strategy -> best for the player regardless of any strategy chosen by the rival
  • Nash Equilibrium -> best for both firms without “incentive to cheat”
• if gov't sets price where demand curve intersects ATC, this transfers some of producer surplus to consumers, expands output and reduces DWL
• price discrimination : charging different prices to different customers based on their characteristics