Term
| characteristics of monopoly |
|
Definition
-single seller
-unique product (no close substitutes)
-absolute barrier to entry (to other firms that may want to come into the market) |
|
|
Term
| Types of Barriers to Entry |
|
Definition
-Legal Barriers (legal monopoly)
-Market-based barriers |
|
|
Term
|
Definition
| a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright |
|
|
Term
| Legal barriers: types of legal monopolies |
|
Definition
-patent
-public franchises
-licensing |
|
|
Term
|
Definition
patents allow inventors/innovators the exclusive right to market an invention for 20 years
-example: Pfizer-Viagra |
|
|
Term
| Patent: what's in it for the inventor, government and consumer? |
|
Definition
-inventor: monopoly on product for 20 years
-government: tax revenues, encourages innovation
-consumers: price drops after 20 years, more variety of products due to innovation
- |
|
|
Term
|
Definition
government grants an exclusive right to supply/ service to a market area
example: Pepsi Cola at Tarleton State |
|
|
Term
| Public franchise: what's in it for the firm, government and consumer? |
|
Definition
-firm: goods on the market for a higher price
-government: sponsorship/franchise fees
-consumer: not many upsides |
|
|
Term
|
Definition
| licensing represents a variation of the public franchise and has the effect of reducing competition in some markets |
|
|
Term
| Market-based barriers to entry |
|
Definition
market-based barriers arise when special market conditions make it possible for one firm to control all/most of a market
-control of a resource
-economies of scale |
|
|
Term
|
Definition
| under certain conditions, a firm may obtain/maintain a monopoly power through ownership or control of a key natural resource/s |
|
|
Term
| example of a control of a resource |
|
Definition
-ALCOA (Charles Martin Hall) obtained monopoly power in the production of primary aluminum through patents and maintained monopoly power through the exclusive ownership of bauxite mines
-DeBeers maintained control of about 90% of the world's mined diamonds from the late 1930s until the mid 1980s by acting as a marketing agent for almost all the major diamond-producing countries |
|
|
Term
|
Definition
a monopoly that arises because one firm can meet the entire market demand at a lower average total cost than two or more firms could
examples:
-railroads in the early western US--high capital requirement
-businesses in small towns--limited market |
|
|
Term
| Implications of Monopoly Power |
|
Definition
-the firm IS the market and faces the downward sloping market demand curve
-the firm a Price Maker
-these characteristics imply the monopolistic firm will choose the price-quantity combination that maximizes profits/minimizes losses |
|
|
Term
| demand curve for the monopolist |
|
Definition
|
|
Term
|
Definition
| by controlling output, the firm can control the price of the product it sells |
|
|
Term
|
Definition
| a monopolist that sells all of its output for a single price |
|
|
Term
| Relationship between Price (Demand) and Marginal Revenue for a Single-Price Monopolist |
|
Definition
-the demand curve slopes downward, meaning price decreases as output increases
-the single priced monopolist must sell ALL units of its product at a lower price as it expands output
Review:
TR=P*Q
MR=(change in TR)/(change in quantity) |
|
|
Term
| Marginal Revenue for the Single-Price Monopolist |
|
Definition
| -MR declines faster than price, because the firm must sell ALL units of its product at a lower price when output expands |
|
|
Term
| Profit-Maximizing Output for the Single-Price Monopolist |
|
Definition
-like the competitive seller, the monopolist maxes profits/min. losses by producing at the output level where MR=MC (as long a P>AVC)
-Note: MR falls faster than price |
|
|
Term
| Price Setting for the Single-Price Monopolist |
|
Definition
| the firm sets a price dictated by the position of the demand curve at the profit maximizing output level |
|
|
Term
| Comparison of single-price monopoly to perfect competition (price and output) |
|
Definition
| given identical cost and demand conditions, the monopolist produces LESS output and charges a HIGHER price than a perfectly competitive market |
|
|
Term
| Comparison of single-price monopoly to perfect competition (persistence of economic profits) |
|
Definition
-in a perfectly competitive industry, the entry of new firms will drive price down to minimum ATC and eliminate the firm's economic profits
-under monopoly, the barrier to entry prevents firms from entering the market and competing away economic profits |
|
|
Term
| Implications of Monopoly Power |
|
Definition
-the firm IS the market and faces the downward sloping market demand curve
-the firm a Price Maker
-these characteristics imply the monopolistic firm will choose the price-quantity combination that maximizes profits/minimizes losses |
|
|
Term
| Comparison of single-price monopoly to perfect competition (productive efficiency) |
|
Definition
-perf. competition: price and output are always forced down to minimize ATC in the long run
-monopoly:absolute barrier to entry enables the firm to maintain P>ATC in the long run |
|
|
Term
| Comparison of single-price monopoly to perfect competition (allocative efficiency) |
|
Definition
| -monopolist: P>MC (monopoly rent) so monopoly tends to be less advantageous to consumers than perfect competition |
|
|
Term
| Forces that may reduce/eliminate monopoly profits in the long run: Development of Imperfect Substitutes |
|
Definition
Example: development of imperfect substitutes for Viagra (it can't be the same formula, since it's patented, but it does the exact same thing):
-Levitra
-Cialis
-Enzyte |
|
|
Term
| Forces that may reduce/eliminate monopoly profits in the long run: Means of Gaining Monopoly Power |
|
Definition
-buy a monopoly: a process called the capitalization of profits drives up the price of a firm with monopoly power to the point that the buyer realizes only a normal rate of return on his/her investment
-example: taxicab medallions in NYC. the city issued about 11,800 (later issued about 2000 more)and charged a$10 fee for them in 1937. cab drivers are allowed to buy/sell medallions. now the price of a cab medallion is about $600,000 |
|
|
Term
| Forces that may reduce/eliminate monopoly profits in the long run: Means of Gaining Monopoly Power Cont. |
|
Definition
Rent-Seeking: the expenditure of resources to transfer wealth/income from one group to another that does not result in increased production
-firms may make political efforts to secure monopoly power
-the cost (political contributions, bribes, franchise fees, etc.) associated with this monopoly rent seeking may reduce/eliminate the firm's long-run profits |
|
|
Term
| The Means by which capitalization of profits and monopoly rent seeking reduce monopoly profits |
|
Definition
-both the capitalization of profits and monopoly rent seeking reduce monopoly profits by driving costs higher--not by driving price lower, as is the case with perf. competition
-consumers tend to get a better deal with competition than with monopoly |
|
|
Term
| could this monopolist make higher revenues if it charged different prices to different buyers based on their ability/willingness to pay? |
|
Definition
| this question is answered by monopoly's pricing policy |
|
|
Term
|
Definition
| a monopoly that sells different units of a good/service for different prices not related to cost differences |
|
|
Term
| conditions necessary for price discrimination: |
|
Definition
-the seller must be a price taker (have some degree of monopoly power)
-the seller must be able to identify different buyers/groups of buyers willing to pay different prices
-it must be impossible/prohibitively costly for customers to engage in arbitrage |
|
|
Term
| First Degree (Perfect) Price Discrimination |
|
Definition
Price discrimination that charges the highest price that consumers are willing to pay for each unit
-TR is determined by the sum of all the prices (instead of P*Q as it is with the single-price monopoly)
*(see slide about the effects of first degree price discrimination) |
|
|
Term
| Observation of First Degree Price Discrimination |
|
Definition
| when the monopolist charges each buyer the highest price he/she is willing to pay (i.e. practice 1st degree price discrimination) the firm's total revenues increase |
|
|
Term
| examples of 1st degree price discrimination |
|
Definition
-new cars
-university financial aid
-airlines (historically) |
|
|
Term
| Second-degree price discrimination |
|
Definition
-AKA Quantity discounting
-sellers charge lower prices to buyers of large quantities than buyers of lower quantities, where these differences are not fully accounted for by differences in cost |
|
|
Term
| Example of Second degree price discrimination |
|
Definition
| city water works Stephenville water company |
|
|
Term
| Third Degree Price Discrimination |
|
Definition
| the practice of charging different prices in different markets for the same good/service (this is the most common price discriminator) |
|
|
Term
| Examples of Third-degree price discrimination |
|
Definition
-dumping (foreign trade)
-senior citizen discounts
-coupon pricing
-books
-medical care/prescription drugs (insurance, etc.) |
|
|
Term
| Effects of Price discrimination |
|
Definition
-higher monopoly profits (price discrimination enhances the firm's total revenues)
-usually, greater output |
|
|
Term
| Marginal Revenue under the 1st degree price discrimination observations |
|
Definition
P=MR
-this is because the firm sells only additional units of output at lower prices as output expands |
|
|
Term
| Single-Price Monopoly output and Pricing criteria |
|
Definition
Q = (where MR and MC meet)
P = (where quantity meets the demand curve) |
|
|
Term
| First Degree Discriminating Monopolist Output and Pricing Criteria |
|
Definition
Q = (where MR=D=P)
-The firm charges prices ranging from the point where MR=D, to where D ends-highest point) |
|
|
Term
| Advantages/Disadvantages of Price Discrimination (compared to Single-Price Monopoly) |
|
Definition
Advantages:
-greater output
-lower prices for some buyers
Disadvantages:
-higher average price level
-higher prices for most consumers |
|
|
Term
| Future of Price Discrimination: Impact of the Internet |
|
Definition
| the development/spread of the internet allows consumers enhanced opportunities to compare prices |
|
|
Term
| Future of Price Discrimination: Rivals with Flatter Price Schedules |
|
Definition
companies with simplified (flatter) price schedules have successfully challenged companies who have historically practiced price discrimination
-ex: Southwest Airlines |
|
|
Term
| Forces Weakening Price Discrimination: |
|
Definition
-greater ability of consumers to compare prices (ex: the internet)
-increased competition in markets where price discrimination has historically been practiced |
|
|
Term
| Forces Maintaining Price Discrimination: |
|
Definition
-Corporate Culture
-mergers, acquisitions, and the reduction of competitive forces |
|
|
