ECON1010 Lecture Notes - Lecture 8: Monopolistic Competition, Market Power, Price Ceiling
Lecture 8 - Market Power: Monopoly
Wednesday, 25 April 2018
10:00 AM
<<Chapter7_slides(1) (1).pptx>>
• An imperfectly competitive market does not follow at least one of the criteria for a perfectly
competitive market
• A firm is a price-maker if they have the ability to set their own prices
• A firm has market power if they have the ability to set their own prices
• Types of market power:
o Monopoly is when there is only one firm
o Monopolistic competition is when there is a large number of firms each producing
slightly different goods
o Oligopolistic competition is when there are a small number of firms selling goods that
are close substitutes
• The antidote to market power is free entry/exit
o Barriers to entry include
• Control over scarce resources
• Government created barriers like patents, copyrights and licenses
• Increasing returns to scale
• Network economies
• Increasing returns to scale (Economies of scale) is when the average cost of producing a
certain good decreases with the amount of good produced
• Firms experiencing this become more profitable with size
o A single firm producing a large quantity of the good can do so more efficiently than a
large number of firms each producing small quantities, this is a natural monopoly
• A Natural monopoly denotes a monopoly that occurs because of increasing returns to scale
• Monopoly is a market structure where there is only one firm operating in the market
• Number of units that maximizes monopolists profit is where MR=MC
• There is a conflict between what the monopolist wants and what the consumer desires
o To sell more units the monopolists must decrease the price, but this causes the cost of
the units sold to increase (higher quantity sold, higher amount produced)
• Competition Law denotes a law that is intended to foster market competition by regulating
the anti-competitive conduct of firms
o This ensures that consumers are charged the lowest possible prices
• The average cost pricing denotes a policy through which the government forces the
monopolist to set the price and quantity at the intersection of the ATC curve and the demand
curve
o This eliminates any positive profit accrued to the monopolist
o This is hard to implement because
• Government doesn't know ATC
• Firms would have no incentive to invest in new technology to decrease costs
• Firm's output would be allocatively inefficient
• Allocatively inefficient means that the price asked for the goods produced exceeds their
marginal cost
o Solution is to set price ceiling at MC
• First degree price discrimination describes a situation in which the monopolist knows the
reservation price of each consumer and is able to charge each consumer this amount
• Second degree price discrimination is when the monopolist charges different prices
depending on the quantity/quality demanded by each consumer
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