Chapter 10 Notes Monopoly and other forms of imperfect competition

-imperfectly competitive firm/price setter – a firm with at least some latitude to set its own price
-a holder of a copyright
-pure monopoly – a market in which a single firm is the lone seller of a unique product
-monopolistic competition – an industry structure in which a large number of firms produce
slightly differentiated products that are reasonably close substitutes
for one another
-oligopoly – an industry structure in which a small number of large firms produce products that
are either close or perfect substitutes
-whereas the perfectly competitive firm faces a perfectly elastic demand curve for its product, the
imperfectly competitive firm faces a downward-sloping demand curve
-market power – a firm’s ability to raise the price of a good without losing all its sales
-constant returns to scale – a production process is said to have constant returns to scale if, when
all inputs are changed by a given proportion, output changes by the
same production
-increasing returns to scale/economies of scale – a production process is said to have increasing
returns to scale if, when all inputs are
changed by a given proportion, output
changes by more than that proportion
-natural monopoly – a monopoly that results from economies of scale
-marginal revenue – the change in a firm’s total revenue that results from a one-unit change in
output
-marginal revenue for a competitive firm is simply the market price. To a monopolist, in contrast,
the marginal benefit of selling an additional unit is strictly less than the market price
-the cost-benefit principle says that the monopolist should continue to expand output as long as
the gain from doing so exceeds the cost
-profit is maximized at the level of output for which marginal revenue precisely equals marginal
cost
-price discrimination – the practice of charging different buyers different prices for essentially
the same good or service
-perfectly discriminating monopolist – a firm that charges each buyer exactly his or her
reservation price
-hurdle method of price discrimination – the practice by which a seller offers a discount to all
buyers who overcome some obstacle
-perfect hurdle – a threshold that completely segregates buyers whose reservation prices lie
above it from others whose reservation prices lie below it, imposing no
cost on those who jump the hurdle
-public policy toward natural monopoly
-state ownership and management
-state ownership so as to set price equal to marginal cost and absorb the resulting
losses out of taxes, however those monopolies are inefficient generally
-state regulation of private monopolies
-cost-plus regulation – a method of regulation under which the regulated firm is
permitted to charge a price equal to its explicit costs of
production plus a markup to cover the opportunity cost of
resources provided by the firm’s owners
-exclusive contracting for natural monopoly
-competition among bidders to provide a service for a certain amount of money
-vigorous enforcement of antitrust laws
-the Sherman Act and the Clayton Act were passed to promoted competition but
they may also prevent companies from achieving economies of scale