Flashcards
Monopoly
Cards in this deck (23)
- 1What are our basic monopoly assumptions?- Linear demand
- Constant MC - 2What are the predictions of basic monopoly?- Demand has twice the slope of MR
- Pm > MC therefore if perfect competition, the monoploy introduces allocative efficiency
- Qm is half of Qc
- DWL is exactly the same as consumer surplus and exactly half of monopoly profits pre any fixed costs - 3What 3 facts do we know mathematically about monopoly?1. Profit maximising monopolist will charge a price above MC
2. MR = P(Q)(1 + 1/ε) therefore monopolists price on the elastic part of the demand curve to push prices up
3. The ratio of price minus MC over price is known as the lerner degree of monopol . At equilibrium this is 1 over the minus of elasticity of demand - 4What attempts have there been to quantify DWL?Harberger (1956): US figure to be less than 1% of GDP
Cowling and Mueller (1978): produced estimates of 3-6% GDP, under linear demand and constant long run MC,
DWL = π/2
James and McHardy (1997): argued profits are hard to observe (accounting reports do not equal economic profit + incentive to alter costs across years), derived measure of DWL as a proportion of sales value on observables - 5What is rent seeking?Innovating around a monopolist in an attempt to take their market position
- 6When can rent seeking be damaging? When can it be productive?Can be damaging if real resources are wasted
If resources expended have economic value then this counts in the gain side of the economy - 7Briefly explain the idea of dynamics in monopolyThe idea that monopoly is not a perminant state but rather part of a process where new tides wash away old structures and replaces them with new ones
If this is the case, only need to worry about the static costs of monopoly - 8What is X-efficiency?In the absense of competition, firms may lack incentive to keep costs at a minimum or efficient level
Hence costs may be higher than in a competitive environment - 9What occurs if there are other firms which are classified as substitutes?Cournot Oligopoly
n identical firms that share the same inverse demand function with no production costs
If all firms maximise profit simultaneously and independently by setting their own output then equilibrium quantity across all firms is given by n/(n + 1)
As the n increases, total output falls: 1/(1 + n)^2
Equilibrium price falls as n increases - 10What happens to price, quantity and DWL if there are substitutes for the monopoly?Price will be below monopoly level
Quantity will be above monopoly level
DWL will be reduced - 11What occurs if there are other firms which are classified as compliments?Cournot Complimentary Monopoly
Output of n monopolists are each required in a single unit of a composite good (pair of shoes) has the same inverse demand and no costs for all firms
If each firm maximises profit by setting price for their component of the composite then equilibrium price for the composite is: n/(1 + n)
Equilibrium price increases as the number of components (monopolists) increases: 1/(1 + n)^2
As n increases, price and quantity falls - 12What happens to price, quantity and DWL if there are compliments for the monopoly?As the number of compliments increases:
- price increases above monopoly
- quantity falls
- DWL increases - 13What is first degree price discrimination?Pigou 1920
Price is set equal to the marginal valuation for each unit consumed by each customer e.g. price at each level of quantity is just equal to the height of the inverse demand curve - 14What is profit in this case?The area under the demand curve bound by MC
- 15What is consumer surplus in this case?The same as profit
- 16What is second degree price discrimination?Consumers offered the same menu of prices but will self select into the one that suits them best. Firms can exploit this.
An individual pays an entry fee and a per unit charge - 17How do firms maximise profit if the monopolist knows which consumers are which type?- Offering type 1 the bundle Q1 at price equal to A
- Offering type 2 the bundle Q2 at a price equal to A + B (where Q2 = 2Q1)
Look at diagram in notes - 18What occurs if the firm is unable to distinguish between type 1 or type 2?- If the menu of bundles is offered to all individuals then type 2 will purchase 2 lots of Q1 rather than 1 lot of Q1 as surplus from Q2 is larger than surplus from Q1
- The seller makes less profit if type 2 does not buy bundle B
- The seller must design a menu of bundles and prices such that each type self selects the bundle which provides the seller with the most profit - 19What occurs if the firm is unable to enforce a particular type buying a particular bundle?If the menu of bundles is offered to all individuals then type 2 will purchase 2 lots of Q1 rather than 1 lot of Q1 as surplus from Q2 is larger than surplus from Q1
- The seller makes less profit if type 2 does not buy bundle B
- The seller must design a menu of bundles and prices such that each type self selects the bundle which provides the seller with the most profit - 20What can the firm do to incentivise buyer to purchase the correct bundle?The seller sells bundle Q1 at price A and bundle Q2 at price A + C
Type 1 will buy bundle Q1 with no remaining surplus
Type 2 will buy bundle Q2 with surplus of B
Look at diagram in notes - 21What can the firm do to ensure both types self-select into the appropriate bundle?The size of the type 1 bundle can be reduced to Q1' which also has the effect of reducing the surplus area from this bundle to the type 2 individual (B')
A' + C' + B is the amount charged for Q2
Look at diagram in notes - 22What is the effect on firm profits in this case?Profit increases
- 23What is third degree price discrimination?Consumers with different demand types can be seperated (rather than self select) and are charged different prices based on their elasticity of demand
Costs are common for serving each market but the markets have different demand functions
The monopolist exploits these differences to increase profit by charging a higher price in the market with more elastic demand
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- Year 2 ECN201 - Microeconomics Flashcards on Monopoly, created by Imogen Donoghue on 04/04/2023.
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- Imogen Donoghue
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