Week 8 study guide

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Published on 1 Dec 2010
School
UTSC
Department
Economics for Management Studies
Course
MGEA02H3
Chapter 10 Monopoly, Cartels, and Price Discrimination Notes
x monopoly : a market containing a single firm
x monopolist : a firm that is the only seller in a market
10.1 A Single – Price Monopolist
Cost and Revenue in the Short Run
x unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve
x monopolist’s marginal revenue is less than price at which it sells its output; thus monopolist’s MR curve is below demand curve
Short Run Profit Maximization
x nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers persistent losses, it will
eventually go out of business
x for a monopolist, there is no unique relationship between market price and the quantity of output supplied; a monopolist
therefore does not have a supply curve
x a perfectly competitive industry produces a level of output such that price equals marginal cost; a monopolist produces a lower
level of output, with price exceeding marginal cost
x 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 insufficient market outcome
Entry Barriers and Long Run Equilibrium
x if monopoly profits are to persist in the long run, the entry of new firms into the industry must be prevented
x entry barrier : any barrier to the entry of new firms into an industry; an entry barrier may be natural or created
x 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
x in competitive industries, profits attract entry, and entry erodes profits; in monopolized industries, positive profits can persist as
long as there are effective entry barriers
The Very Long Run and Creative Destruction
x 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, except those that are protected through government
charter or regulation
10.2 Cartels as Monopolies
x cartel : an organization of producers who agree to act as a single seller in order to maximize joint profits
The Effects of Cartelization
x profit-maximizing cartelization of a competitive industry will reduce output and raise price from the perfectly competitive levels
Problems that Cartels Face
x 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
10.3 Price Discrimination
x price discrimination : the sale by one firm of different units of a commodity at two or more different prices for reasons not
associated with differences in cost
x if price differences reflect cost differences, they are not discriminatory; when a price difference is based on different buyers’
valuations of the same product, it is discriminatory
x any firm that faces a downward-sloping demand curve can increase its profits if it is able to charge different prices for different
units of its product
Different Forms of Price Discrimination
x 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
x price discrimination is easier for services than for tangible goods because for most services the firms transact directly with the
customer, and thus can more easily prevent arbitrage
x hurdle pricing exists when firms create an obstacle that consumers must overcome in order to get a lower price; consumers then
assign themselves to the various market segments—those who don’t want to jump the hurdle and are willing to pay the high
price, and those who choose to jump the hurdle in order to benefit from the low price
The Consequences of Price Discrimination
x for any given level of output, the most profitable system of discriminatory prices will always provide higher profits to the firm
than the profit-maximizing single price
x a monopolist that price discriminates among units will produce more output than will a single-price monopolist
x if price discrimination leads the firm to increase total output, the total economic surplus generated in the market will increase,
and the outcome will be more efficient
x there is no general relationship between price discrimination and consumer welfare; price discrimination makes some consumers
better off and other consumers worse off
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Document Summary

Chapter 10 monopoly, cartels, and price discrimination notes. N monopoly  a market containing a single firm. N monopolist  a firm that is the only seller in a market. N monopolist"s marginal revenue is less than price at which it sells its output; thus monopolist"s mr curve is below demand curve. N monopoly is a market structure in which an entire industry is supplied by a single firm. The monopolist"s own demand curve is identical to the market demand curve for the product. The market demand curve is the monopolist"s average revenue curve, and its marginal revenue curve always lies below its demand curve. N a single-price monopolist is maximizing its profits when its marginal revenue is equal to marginal costs. Since marginal costs are positive, profit maximization means that marginal revenue is positive. Thus, in turn, elasticity of demand is greater than 1 at the monopolist"s price-maximizing level of output.