Midterm 1

Characteristics of a MONOPOLIST?
o Produces less than the socially efficient level of output
o Charges a Price>MC
DO #4
Characteristics of an OLIGOPOLY MARKET?
o Definition: industry structure where a SMALL number of large firms
produce products that are either CLOSE or PERFECT substitutes.
Examples: Cell-phone companies
o Oligopoly is typically a consequence of cost advantages that prevent
small firms from being able to compete effectively.
o CASE #1: oligopolists sell undifferentiated products; AT&T, Verizon,
Sprint = All identical.
STRATEGIC DECISION: pricing and advertising than specific
features of product
o CASE #2: Oligooplists are more like monopolistic competitors than pure
monopolists differences in their product features have significant
effects on consumer demand; Cigarette smokers rarely switch to a
different brand, Ford buyers not considering buying a Chevy, etc.
STRATEGIC DECISION: Pricing, advertising AND specific product
features.
o Cost advantages associated with large-scale operations tend to be
important. Oligopolists may produce either standardized products of
differentiated products.
5 MARKET POWERS
o Exclusive Control over Important Inputs
Ex) When a single firm controls an essential input to the
production of a given product, that firm will have market power.
o Patents and Copyrights
Ex) Patents give developers or inventors exclusive right to sell
for a specific time frame. Protection of exclusive right to be
the only seller of a product = Can set a price above MC.
o Government Licenses or Franchises
Ex) Yosemite has exclusive license to run lodging and concession
operations.
o Economies of Scale and Natural Monopolies:
Constant returns to scale: when output exactly doubles when
factors of production(inputs) are also doubled.
Increasing returns to scale (economies of scale): when output
more than doubles.
WHAT ARE THE DIFFERENCES BETWEEN THE TWO ^ ? MAKE
SURE YOU KNOW
o Network Economies

2 MOST POWERFUL MARKET POWERS

o Economies of Scale/Natural Monopolies widespread and enduring

Network Economies can be viewed as another form economies of

scale in production because network economies arises out increased
value.
When do products have network economies?
o Products have network economies if they are more valuable to own as
more people own them. (A good is valuable because when many
consumers own them, it becomes compatible; apple products)
PERFECTLY COMPETITIVE & MONOPOLIST FIRM PRICING
o P = MR; P > MR
MARKET EQUILIBRIUM CHARACTERISTICS
o No more trades remain that benefit some without harming others
Do #9
CHARACTERICS OF A PERFECTLY COMPETITIVE MARKET
o All firms sell same standardized product
o Market has many buyers and sellers; each of which buys and sells only
a small fraction of the total quantity exchanged
o Productive resources are mobile = free entry and exit in market
(orange producers are easy to produce and start selling; also easy to
leave market)
PRICING AND PROFIT-MAXIMIZING
o Monopolist
Maximizes profit @ strictly below market price (MC=MR)
o

5
4
3

Series 1

Series 2

1
0

Perfectly Competitive
Maximizes profit @ market price. (MR=P)
6
5
4
3
2
1
0

Series 1
Series 2
Series 3

o Oligopolist
Do # 13 !!!
Do 14
Do 15
Do all graph problems