Cards (65)

  • Monopoly
    • One firm, one seller dominating the market
    • Theoretical extreme of pure monopoly with 100% market share
    • Realistic sense of monopoly power with at least 25% market share (legal monopoly)
  • Monopolycharacterists

    • Differentiated, unique products
    • High barriers to entry and exit
    • Imperfect information on market conditions
    • Profit maximizing firm producing where MR=MC
    • price makers
  • Monopolist's behaviour

    1. Downward sloping demand (average revenue) curve
    2. Marginal revenue twice as steep as demand curve
    3. Average cost curve (smiley face)
    4. Marginal cost curve (cuts AC at lowest point)
  • Monopolist produces

    Where MC=MR (quantity q1)
  • Price
    Read from demand (AR) curve (price p1)
  • At quantity q1, monopolist makes supernormal profits
  • Monopolist is not allocatively efficient
  • Monopolist is not productively efficient
  • Monopolist may exhibit X-inefficiency
  • Monopolist has potential for dynamic efficiency through reinvestment of long-run supernormal profits
  • Price discrimination
    When a firm charges different prices to different consumers for an identical good or service with no differences in costs of production
  • Conditions for price discrimination
    • Firm has price making ability (monopoly power)
    • Firm has information to separate market into different segments based on price elasticity of demand
    • Firm can prevent resale (market seepage)
  • Degrees of price discrimination

    • First degree
    • Second degree
    • Third degree
  • First degree price discrimination

    Consumers are charged the exact price they are willing and able to pay, eroding all consumer surplus and turning it into monopoly profit
  • First degree price discrimination

    Turns consumer surplus into monopoly profit
  • Second degree price discrimination (excess capacity pricing)

    • Firm with fixed capacity lowers prices to fill excess capacity and contribute towards fixed costs
    • Consumers who pay lower price for excess capacity gain consumer surplus
  • Firm has fixed capacity
    It makes sense to lower prices to fill excess capacity and contribute towards fixed costs
  • Third degree price discrimination

    Firm segments market into different price elasticity of demand groups and charges different prices to each group
  • Firm segments market into different price elasticity of demand groups

    Charges higher prices to inelastic demand group, lower prices to elastic demand group to maximize profits
  • Pros of price discrimination
    • Greater profits for firm, potential for reinvestment and dynamic efficiency benefits
    • Some consumers benefit from lower prices (second and third degree)
    • Cross-subsidization of loss-making goods/services
  • Cons of price discrimination

    • Allocative inefficiency from prices above marginal cost
    • Potential to increase income inequality
    • Anti-competitive effects (third degree)
  • The cons of price discrimination outweigh the pros, as the core issue of consumer exploitation is very significant
  • Natural monopoly

    A submerge of monopoly theory, a brilliant market structure to investigate and analyze
  • Natural monopoly markets

    • Utilities (water distribution, gas, electricity distribution, internet distribution)
    • Rail track providers
  • Characteristics of a natural monopoly market

    • Huge fixed costs, especially startup costs
    • Huge potential for economies of scale
  • Competition is undesirable in a natural monopoly market
  • How a natural monopolist operates

    1. Profit maximization by producing where marginal revenue equals marginal cost
    2. Charging a price higher than the allocated efficient price, resulting in supernormal profits
  • Regulator's response to a natural monopolist's high prices and low quantities

    Regulates the natural monopolist to the allocated efficient price and quantity
  • Regulating a natural monopolist to the allocated efficient point

    Results in the natural monopolist making sub-normal profits
  • Many natural monopoly industries have state-run natural monopolies instead of private ones
  • Private natural monopolists are often heavily subsidized and regulated to ensure they can continue producing
  • Monopoly
    A highly concentrated market with a single seller
  • Cons of monopolies
    • Allocative inefficiency
    • Prices higher than marginal cost
    • Lower consumer surplus
    • Restrict output
    • Restrict choice
    • Quality issues
  • Allocative inefficiency

    Monopolies charge higher prices and produce lower output compared to competitive markets
  • Productive inefficiency

    Monopolies do not minimise costs by operating at the lowest point of their average cost curve
  • Monopolies are productively inefficient
    They voluntarily forego economies of scale
  • Monopolies are productively inefficient</b><b>They suffer diseconomies of scale</b>

    They suffer diseconomies of scale
    1. inefficiency
    Monopolies allow for waste in their production process and complacency due to lack of competitive drive
  • Monopolies cause higher prices
    This leads to income inequality, especially in necessity markets
  • Pros of monopolies
    • Dynamic efficiency benefits
    • Ability to exploit greater economies of scale