ECON-1006EL Chapter Notes - Chapter 10: Price Discrimination, Market Power, Demand Curve
23 May 2018
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Chapter 10: Monopoly, Cartels and Price Discrimination
Definitions
Monopoly
A market containing single firm.
Monopolist
A firm that is the only seller in a market.
Entry Barrier
Any barrier to the entry firms into an industry. An entry barrier may be natural
or created.
Natural Monopoly
An industry characterized by economies of scale sufficiently large that only one
firm can cover its costs while producing at its minimum efficient scale
Cartel
An organization of producers who agree to act as a single seller in order to
maximize joint profits
Price
Discrimination
The sale by one firm of different units of a product at two or more different
prices for reasons not associated with differences in cost.
Key Points
• Unlike a perfectly competitive firm, a monopolist faces negatively sloped demand curve.
• The monopolist’s marginal revenue is less than the price at which it sells its output. This
the monopolist’s MR curve is below its demand curve.
• Nothing guarantees that a monopolist will make positive profits in the short run, but if it
suffers persistent losses, it will eventually go out business.
• For a profit-maximizing monopolist, price is greater than marginal cost.
• A monopolist does not have a supply curve because it is not a price taker; it chooses its
profit-maximizing price-quantity combination from among the possible combinations on
the market demand curve.
• A monopolist restricts output below the competitive level and thus reduces the amount of
economic surplus generated in the market. The monopolist therefore creates an inefficient
market outcome.
• If monopoly profits are to persist in the long run, the entry of new firms into the industry
must be prevented.
• A monopolist’s entry barriers are often circumvented by the innovation of production
processes and the development of new goods and services. Such innovation explains why
monopolies rarely persist over long periods, expect those that are protected through
government charter or regulation.
• The profit-maximizing cartelization of a competitive industry will reduce output and raise
price from the perfectly competitive levels.
• Cartels tend to be unstable because of the incentives for individual firms to violate the
output restrictions needed to sustain the joint-profit-maximizing (monopoly) price.
• If price differences reflect cost differences, they are not discriminatory. When price
differences are based on different buyers’ valuations of the same product, they are
discriminatory.
• Any firm that faces a downward-sloping demand curve an increase its profits if it is able
to charge different prices for different units of its product.
• A firm with market power that can identify distinct market segments will maximize its
profits by charging higher prices in those segments with less elastic demand.
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Document Summary
A firm that is the only seller in a market. Any barrier to the entry firms into an industry. An entry barrier may be natural or created. Natural monopoly an industry characterized by economies of scale sufficiently large that only one firm can cover its costs while producing at its minimum efficient scale. An organization of producers who agree to act as a single seller in order to maximize joint profits. The sale by one firm of different units of a product at two or more different prices for reasons not associated with differences in cost. Key points: unlike a perfectly competitive firm, a monopolist faces negatively sloped demand curve, the monopolist"s marginal revenue is less than the price at which it sells its output. The monopolist therefore creates an inefficient market outcome. If price differences reflect cost differences, they are not discriminatory.
