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

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