Monopoly – Flashcards
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What is Barriers to Entry?
Patents are granted to inventors of a product or process for a certain number of years. The reason for this is to encourage innovation in the economy. Without the existence of patents, it is argued that research and development for improved electronics is unlikely to take place, since there's nothing preventing another firm from stealing the idea, copying the product, and producing it without incurring the development costs.
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Barriers to Entry
Government-Created Monopolies
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What is Barriers to Entry?
In the electricity industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary wiring makes it risky and, most likely, unprofitable for competitors to enter the market.
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Barriers to Entry
Economies of Scale
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What is Barriers to Entry?
Throughout much of the twentieth century, many people viewed South Africa's De Beers group as a monopoly because it controlled a large percentage of diamond production and sales.
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Barriers to Entry
Exclusive Ownership of a Key Resource
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Total Revenue
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TR = P x Q
TR=total revenue
P= price
Q= quantity
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Marginal Revenue
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MR = ΔTR / ΔQ
MR= marginal revenue
ΔTR= change in total revenue
ΔQ = change in quantity
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The output effect
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More output is sold, so Q is higher, which tends to increase total revenue.
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The price effect
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The price falls, so P is lower, which tends to decrease total revenue.
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Revenue lost
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(Initial price - New price) x Initial Quantity
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The marginal revenue of a competitive firm...
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equals its price.
P = MR = MC
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The marginal revenue of a monopoly is...
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less than its price.
P > MR = MC
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Profit
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Profit = TR - TC
TR = total revenue
TC = total cost
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Profit for monopoly
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Profit = (P - ATC) x Q
P = price
ATC = average total cost
Q = quantity
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The profit-maximizing quantity occurs where...
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marginal revenue equals marginal cost
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Is this Price Discrimination?
Hotels charge a higher price for rooms with a nicer view, such as a skyline view or a coastal view. Assume that all consumers receive a higher utility when staying in a room with a nicer view.
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Price Discrimination?
No
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Is this Price Discrimination?
Last-minute "rush" tickets can be purchased for most Broadway theater shows at a discounted price. They are typically distributed via lottery or on a first-come, first-served basis a few hours before the show. Assume that the theater in question does not hold seats in reserve for this purpose, but rather offers rush tickets only for seats not sold before the day of the performance.
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Price Discrimination?
Yes
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Is this Price Discrimination?
Horizon Wireless offers various features "a la carte" that a customer may add to his or her calling plan, such as a text messaging package, a data package, and an Internet package.
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Price Discrimination?
No
Because Horizon Wireless is offering the different add-ons via a la carte pricing, this is not an example of price discrimination. Everyone is subject to the same pricing regardless of his or her calling plan. If the price of a text messaging package were different for a customer with a more expensive calling plan, then Horizon Wireless might be attempting to identify various consumer types and exploit the differences in their willingness to pay.
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Is this Price Discrimination?
Southeast Airlines offers domestic flights to a variety of U.S. cities. The company's last-minute flight discount service, Ping, can be downloaded for free from its website. Each day, Ping will alert users to that day's deals. These deals are available for a short period of time and are good for travel only between certain locations during specified travel periods. Therefore, business travelers tend not to take advantage of these offers.
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Price Discrimination?
Yes
This pricing scheme by Southeast Airlines is a way to price discriminate between last-minute-getaway consumers and business consumers. Business travelers do not have flexibility regarding when and where they travel—if their company meeting is in New York City on a Tuesday, they must get to New York City that morning. Therefore, Ping deals are meant to attract a consumer who is debating a last-minute trip but doesn't necessarily need to go—in other words, that consumer has a lower willingness to pay for a flight and might be willing to purchase a ticket for the special Ping price.
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Single-price Monopoly or Perfect Price Discrimination?
Total surplus is not maximized.
Barefeet produces a quantity less than the efficient quantity of Ooh boots.
There is not deadweight loss associated with the profit-maximizing output.
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Total surplus is not maximized in Single-price Monopoly
Barefeet produces a quantity less than the efficient quantity of Ooh boots in Single-price Monopoly
There is not deadweight loss associated with the profit-maximizing output in Perfect Price Discrimination
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True or False: Without government regulation, natural monopolies never earn zero profit in the long run.
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False
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True or False: Without government regulation, natural monopolies can earn positive profit in the long run.
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True
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Suppose that the government is concerned that an electric utility company is taking advantage of consumers with unfair pricing policies. The government views electricity as a public good that is likely to be produced inefficiently by the private sector.
Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?
Use the law to increase competition.
Do nothing at all.
Regulate the pricing behavior.
Turn the company into a public enterprise.
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Turn the company into a public enterprise.
When a natural monopoly, such as an electric utility, is forced to sell itself to a public institution, the private monopoly will become a public enterprise. Such a policy option, which might be chosen by a government that views electricity as a public good, is generally the European approach to providing utilities. A potential drawback of this approach is that government managers may have little incentive to keep costs down.
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Suppose that a computer software company controls the operating system market. Although the government knows that the price is higher than it would be in the presence of competition, it believes that such profits are crucial to incentivizing innovation in the high-tech industry, a policy goal of the government.
Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?
Do nothing at all.
Use the law to increase competition.
Turn the company into a public enterprise.
Regulate the pricing behavior.
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Do nothing at all.
If a computer company controls a sizable share of the operating system market, then consumers may believe that the lack of choice or competition is harmful. Yet the government may not have enough evidence to act against the company, or it may be led by politicians who believe in limited government interference in the market. Either situation can lead the government to do nothing at all about a monopoly
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Suppose that a telecommunications company controls a large share of the national market. The government believes that the economies of scale in this industry are not significant, and, therefore, multiple smaller firms would be able to provide lower prices.
Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?
Regulate the pricing behavior.
Turn the company into a public enterprise.
Do nothing at all.
Use the law to increase competition.
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Use the law to increase competition.
If a telecommunications company controls the market, the government may find it necessary to split up the firm. Using the power granted by antitrust laws, the government can increase competition and help consumers. One example of this occurred when the government split up AT&T into eight smaller companies in the 1980s.
