Section 8

Question 1

Pure Monopoly

Answer 1

Single Seller
No close substitutes
Price maker
Blocked Entry

Question 2

Near Monopoly

Answer 2

A single firm has the bulk of sales, like Intel with 80% of the chip market.

Question 3

Geographic Monopolies

Answer 3

Monopoly in a geographic area like in a town.

Question 4

Barriers to Entry (Monopolist)

Answer 4

1. Economies of scale (long-run ATC declines)
2. Legal barriers to entry (patents, licenses)
3. Ownership or control of essential resources
4. Pricing and other strategic barriers to entry (price undercutting, etc.)
5. Network externalities - one item demands the use of another item.

Question 5

Natural Monopoly

Answer 5

Market demand curve intersects the long-run ATC curve at any point where average total costs are declining.

Question 6

Demand Curve (Monopolist)

Answer 6

Company demand is the industry demand.

Demand curve is downward sloping

Three implications:

1. Marginal revenue is less than price
2. Monopolist is the price maker
3. Sets prices in the elastic region of demand

Question 7

Marginal Revenue is Less Than Price (Monopolist)

Answer 7

Can increase sales only by charging a lower price. Must charge all customers the same price.

Since each unit made drops the price on the demand curve total revenue increases at a diminishing rate. Also MR curve lies below the demand curve.

MR falls twice as fast as demand.

Marginal revenue is positive while total revenue is increasing. when TR maxes then marginal revenue is zero. TR diminishing is a negative MR.

Question 8

Price Maker (Monopolist)

Answer 8

Those with downsloping demand curves are price makers

Question 9

Sets Prices in the Elastic Region of Demand (Monopolist)

Answer 9

When elastic, a decline in price will increase total revenue.
When inelastic, a decline in price will reduce total revenue.

Question 10

Determining Output (Monopolist)

Answer 10

MR = MC

Question 11

Determining Price (Monopolist)

Answer 11

Follow quantity curve up to demand curve

Creates supplier surplus.

Seeks highest total revenue, not highest unit price.

Question 12

Supply Curve (Monopolist)

Answer 12

No supply curve for a monopolist. No unique relationship between price and quantity since MC is less then price.

Question 13

Profit Guarantee (Monopolist)

Answer 13

Can have losses since can’t guarantee demand or increasing production costs.

Question 14

Productive Efficiency (Monopolist)

Answer 14

May be productive efficient if producing at minimum ATC, but since marginal revenue is less then price and price exceed minimum ATC.

Question 15

Allocative Efficiency (Monopolist)

Answer 15

Not allocative efficient since marginal benefit exceeds marginal cost since demand curve lies above supply.

Question 16

Private Tax

Answer 16

Transfer of income from consumers to monopolist since they charge more then minimum ATC.

Question 17

Cost Differences (Monopolist)

Answer 17

1. Economie of scale
2. x-inefficiency
3. Monopoly preserving expenditures
4. Technological advance (generally not as progressive) - New technologies can destroy monopolies.

Question 18

X-Inefficiency

Answer 18

Produces higher then necessary. Mostly due to inefficient management.

Question 19

Rent-Seeking Expenditures

Answer 19

Transfer income to someone else. Seeks to keep their monopoly.

Question 20

Price Discrimination (defined for Monopolists)

Answer 20

Increase profits by charging more to some buyers.

1. Charge each customer the max they are willing to pay
2. One price for the first set, then lower prices for subsequent units
3. Charging some customers one price and others another price

Question 21

Conditions for Price Discrimination (Monopolist)

Answer 21

Is possible when these conditions are met:

1. Has a monopoly
2. Market segmentation is possible
3. Resale of products is not possible

Question 22

Rate Regulation

Answer 22

When competition is not possible the government might regulate prices.

Locally regulated monopolies are called public utilities.

Question 23

Socially Optimal Price (Monopolist)

Answer 23

P = MC

AKA Economically Efficient. Allocatively Efficient since it is where the demand curve intersects with the marginal cost curve.

ATC is not covered, price is to low.

Need to offer subsidy or take a loss.

Question 24

Fair-Return Price (Monopolist)

Answer 24

P = ATC

AKA Average Cost Pricing - Equal to normal profit.

Pushes firms to not watch their costs, cost overrun is common.

Question 25

Oligopoly

Answer 25

- Few large producers - Homogeneous or differentiated products (differentiated will engage in heavy advertising and non-price competition) - Control over price but mutual interdependence - High entry barriers Some have come about by mergers Largest 4 firms control 40% of the market

Question 26

Shortcomings of an Oligopoly

Answer 26

1. Localized Markets - Can be local due to transportation costs 2. Interindustry Competition - substitute products might not be accounted for 3. World Trade - imports can be ignored when looking at oligopolies 4. Dominant Firms - Herfindahl index will show how firms rank in market power.

Question 27

Game Theory

Answer 27

Patterning behavior according to the actions and expected reactions of rivals.

Question 28

Mutual Interdependence

Answer 28

If a firm can increase their profits and influence their rivals by changing their pricing strategies.

Question 29

Collusion

Answer 29

Cooperation with rivals to control price and supply

Question 30

Cause of Oligopoly Models

Answer 30

1. Diversity of oligopolies - (tight is where two of three firms control a market, loose is where six or seven firms shre 70-80% of the market) 2. Compliance of Interdependence - You can't determine your own demand and revenue since you don't know what your rivals will do. (prices are inflexible)

Question 31

Three Oligopoly Models

Answer 31

1. Kinked-Demand theory 2. Cartels and other collusion 3. Price Leadership Model (tactic)

Question 32

Kinked-Demand Theory

Answer 32

Non-collusinv oligopoly Can match changes of rivals or ignore price changes. Can lead to price wars. If they drop their price, you drop yours, if they raise, you leave yours alone. Get a gap in the demand curve at the point of the price change. Since you combine the elastic and inelastic curves together. If one firm rises their price it becomes elastic, a decrease would be inelastic

Question 33

Cartels and Other Collusion

Answer 33

Agree on price and production quantity. Cartel is a group of producers who have a formal agreement on what each member will produce.

Question 34

Obstacles to Collusion

Answer 34

1. Demand and cost differences - each company can have different costs 2. Number of firms - more can be difficult 3. Cheating - secret price cutting, etc. 4. Recession - cut prices to avoid losses 5. Potential Entry - Good profits can lead to new entrants. 6. Legal obstacles - Illegal in some places, anti-trust.

Question 35

Price Leadership Model

Answer 35

Dominate firm sets the price and others follow. Can lead to price wars. Three tactics: 1. Infrequent price changes 2. Communicate through the industry, like speeches 3. Limit Pricing - won't choose a price that maximizes short-run profits to keep competitors out

Question 36

Oligopoly and Advertising

Answer 36

Two reasons: 1. Harder to duplicate product development and advertising (can obtain long-term economies of scale for sales) 2. Can have higher profits for these areas

Question 37

Productive Efficiency (Oligopoly)

Answer 37

Unlikely to occur

Question 38

Allocative Efficiency (Oligopoly)

Answer 38

Unlikely to occur

Question 39

Oligopoly Popularity

Answer 39

Less then a monopoly, with three exceptions: 1. Increased foreign competition can break down collusion 2. Limit pricing - when prices are low to keep competitors out, this can help society 3. Technical advance - They will push for advances to help beat their competitors

Question 40

Collusion Types

Answer 40

- Explicit - Direct communication - Implicit - Coordinate without direct communication - Non-collusion - mutual interdependence - must be aware of what the others are doing - Contestable - Work together to keep others out