Economics Chapter 13

Monopoly and price discrimination

Monopoly -- a market in which a single firm serves the entire market
market power -- the ability to affect the price of a product
patent -- the exclusive right to sell a particular good for some period of time
natural monopoly -- a market in which the economies of scale are so large that only a single large firm can survive
deadweight loss from monopoly -- a measure of the inefficiency from monopolies; with a constant cost industry, equal to the difference between the consumer surplus lost from monopoly pricing and the monopolies profit
rent seeking -- the process of using governments to obtain economic profit
Price discrimination -- the process under which a firm divides consumers into two or more groups and picks a different price for each group

Notes

Compared to a perfectly competitive market, a monopoly means a higher price, a smaller quantity, and resources wasted when firms seek monopoly power. On the positive side, some of the products we use today might never have been invented without the patent system and the monopoly power it grants. Firms with market power often use prices donation to increase their profits.

Compared to a purposely competitive market, a market served by monopolist will have a higher price, smaller quantity of output, and a deadweight loss to society.

Some firms spend money and use resources to acquire monopoly power, a process known as rent seeking.

Patents protect innovators from competition, leading to higher prices for new products but greater incentives to develop new products.

To engage in price discrimination, the firm divides its customers into two or more groups and charges lower prices two groups with more elastic demand.

Price discrimination is not an act of generosity; it's an act of profit maximization.