Monopoly
Define Monopoly
Single seller, no close substitutes, high barriers to entry
What is price discrimination?
When producers charge different prices to different consumers for the same good or service.
What is monopolistic competition?
Define an oligopoly
Several interdependent firms dominate the market
What does it mean when a firm is allocatively efficient?
The firm produces where P = MC; society produces what is most valuable
What gives a firm monopoly power?
Barriers to entry (legal, technological, resource control)
Give an example of price discrimination
Movie theater discounts for seniors/students
What differentiates products?
Branding, quality, features
What is a cartel
An agreement among firms to collude on price and acts as a single monopoly in order to gain more profit.
What does it mean when a firm is productively efficient?
The firm produces at the minimum ATC
Unlike firms in perfect competition, monopolists must lower this in order to sell more output
What is price?
What conditions are needed in order to price discriminate?
Market power, the ability to prevent resale, the willingness of customers to pay.
How does long run equilibrium in monopolistic markets differ from perfectly competitive markets?
Firms earn zero economic profit, but charge where P > MC
In game theory, what is a dominant strategy?
A strategy that is best for a player regardless of an opponents decision
What is the role of antitrust laws?
To prevent monopolies and promote competition
Where do monopolist produce?
What does price discrimination do to consumer surplus?
Consumer surplus decreases or is eliminated under perfect discrimination.
What curve shifts when new firms enter a monopolistically competitive industry?
The firms demand curve shifts left, leading to more substitutes
Define Nash equilibrium
A situation where each firm chooses its best response and no one wants to change their strategy
What is a natural Monopoly?
When it is more efficient for a single firm to supply the entire market rather than for multiple competing firms to do so
How does monopoly cause DWL?
What is perfect price discrimination?
When producers are able to charge each consumer exactly their willingness to pay
Why is production in monopolistic markets inefficient?
Monopolies charge where P > MC, which leads to allocative inefficiency, excess capacity, and productive inefficiency.
Why do cartels tend to break down?
Each member has an incentive to cheat to increase their profit
Why is often required to price regulate natural monopolies?
To prevent excess pricing and reduce deadweight loss