Monopoly, Price Discrimination, and Monopsony — Chapter 12 Study Materials Flashcards

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Monopoly

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A market structure in which a single firm supplies a product with no close substitutes and entry is difficult. The firm is a price maker and faces a downward‑sloping demand curve.

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Pure monopoly

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An industry with only one supplier that sells a product with no close substitutes and where entry is very difficult or impossible. Pure monopolies are rare but provide a useful analytical benchmark.

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Barriers to entry

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Characteristics that make it difficult or costly for new firms to enter a market. Examples include legal restrictions, patents, control of scarce inputs, high sunk costs, and economies of scale.

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Patent

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A government‑granted exclusive right to produce or sell an invention for a limited time. Patents create legal monopolies that give inventors time to recoup R&D investments.

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Natural monopoly

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A market where one firm can supply the entire market at lower average cost than multiple firms due to large economies of scale. Common examples include utilities like water, electricity, and gas.

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Price maker

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A firm that can influence the market price of its product because it faces a downward‑sloping demand curve. Monopolists are price makers, unlike perfectly competitive firms.

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Average revenue (AR)

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Revenue per unit sold, equal to the price for a firm: $AR = P$. For a monopolist, the demand curve is the AR curve.

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Marginal revenue (MR)

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The additional revenue from selling one more unit. For a monopolist $MR < AR$, because selling an extra unit requires lowering price on previous units sold.

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Profit‑maximizing rule

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Firms maximize profit by producing the quantity where marginal cost equals marginal revenue ($MC = MR$). Monopolists then set price from the demand curve at that output.

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Deadweight loss

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The loss of total surplus (consumer plus producer) that occurs when market output is not at the socially efficient level. Monopoly typically creates deadweight loss by restricting output below the competitive level.

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Price discrimination

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Charging different prices to different customers for the same good when cost differences do not justify the price differences. It raises profits by capturing more consumer surplus if customers can be segmented.

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First‑degree discrimination

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Charging each customer their maximum willingness to pay so the firm captures all consumer surplus. It is rare in practice due to information constraints.

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Marginal Input Cost (MIC)

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In a monopsony, the additional cost of purchasing one more unit of an input, which exceeds the price paid for that unit because increasing purchases raises the price on all units bought.

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Monopsony

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A market with a single buyer of an input that has few alternative uses. The monopsonist reduces purchases to depress the price of the input, creating inefficiency.

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Marginal Revenue Product (MRP)

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The additional revenue a firm earns from employing one more unit of an input. A monopsonist buys inputs until $MIC = MRP$.

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Sunk costs

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Costs that cannot be recovered once incurred. Large sunk costs can deter entry and strengthen monopoly power.

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Technical superiority

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When a firm has better technology or know‑how that gives it lower costs or better products, potentially creating a persistent competitive advantage or dominance.

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Legal monopoly

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A monopoly created or protected by law, such as government franchises or exclusive licenses. Examples include postal services and utility franchises.

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Economies of scale

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Cost advantages that arise as a firm expands production, causing average cost to fall. Large economies of scale can support natural monopoly structures.

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Network effects

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When the value of a product increases as more people use it, which can strengthen a firm's market power. Examples include software platforms and social networks.