Test Your Knowledge on Market Structures and Monopolies

Market structure with a single firm dominating the market:

• A monopoly is a market with the "absence of competition", where a specific person or enterprise is the only supplier of a particular thing.

• Monopolies lack economic competition to produce a good or service, lack viable substitute goods, and can lead to a high monopoly price above the seller's marginal cost that leads to a high monopoly profit.

• A government-granted monopoly or legal monopoly is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group.

• Monopolies can be established by a government, form naturally, or form by integration.

• Market structure is determined by factors such as perfect competition, monopolistic competition, oligopoly, and monopoly.

• A monopoly is a structure in which a single supplier produces and sells a given product or service.

• Monopolies derive their market power from barriers to entry, such as economic, legal, and deliberate barriers.

• Barriers to exit may also be a source of market power.

• While monopoly and perfect competition mark the extremes of market structures, there are similarities between the two.

• The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company.

• A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition.

• A pure monopoly has the same economic rationality as perfectly competitive companies, but can alter the market price for its own convenience.Understanding Monopoly: Market Power, Price Discrimination, and the Inverse Elasticity Rule

• Pure monopolies have a downward-sloping demand, meaning they select a higher price and lesser quantity of output than a price-taking company.

• The markup rule states that the ratio between profit margin and price is inversely proportional to the price elasticity of demand, meaning the more elastic the demand, the less pricing power the monopoly has.

• Market power is a company's ability to increase prices without losing all its customers, and monopolies have considerable market power.

• The two primary factors determining monopoly market power are the company's demand curve and its cost structure.

• Price discrimination allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more.

• Perfect price discrimination would allow the monopolist to charge each customer the exact maximum amount they would be willing to pay, but partial price discrimination can cause some customers to be excluded from the market.

• There are three forms of price discrimination: first degree, second degree, and third degree, with third degree being the most prevalent type.

• Three conditions must be present for a company to engage in successful price discrimination: market power, the ability to sort customers according to their willingness to pay, and the ability to prevent resell.

• The inability to prevent resale is the largest obstacle to successful price discrimination, but companies have developed numerous methods to prevent resale.

• Direct information about a consumer's willingness to pay is rarely available, so sellers tend to rely on secondary information such as postal codes.

• In second degree price discrimination, customers are charged different prices based on how much they buy, while in third degree price discrimination, the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand.

• Any determinant of price elasticity of demand can be used to segment markets, such as seniors having a more elastic demand for movies than young adults.Understanding Monopolies

• Monopolies can lead to deadweight loss, inefficiency, and reduced innovation over time.

• Successful price discrimination requires companies to separate consumers based on their willingness to buy.

• Monopolies forgo transactions with consumers who value the product or service less than its price.

• Natural monopolies occur when the average cost of production declines through the relevant range of product demand.

• Government-granted monopolies are coercive monopolies where a government grants exclusive privileges to a private individual or company to be the sole provider of a commodity.

• Monopolies can be ended by new competition, breakaway businesses, or consumers seeking alternatives.

• Regulation of natural monopolies is problematic, and often government regulations are used with natural monopolies to help control prices.

• The monopolist shutdown rule states that a monopolist should shut down when price is less than average variable cost for every output level.

• Establishing dominance is a two-stage test that includes relevant product market and relevant geographic market.

• Market shares are an indicator of the states of the existing competition within the market.

• Undertakings possessing market share that is lower than 100% but over 90% had also been found dominant.

• When considering whether an undertaking is dominant, it involves a combination of factors.Understanding Monopolies

• The European Commission looks at three issues: actual competitors, potential competitors, and countervailing buyer power.

• Market share is a valuable source of information for market structure and position.

• Potential competition is important to consider for assessing competitive pressure.

• Competitive constraints may come from powerful customers with sufficient bargaining strength.

• There are three types of abuses: exploitative, exclusionary, and single market abuses.

• Exploitative abuse is less concerning than other types.

• Exclusionary abuse is most concerning because it can cause long-term consumer damage.

• Single market abuse arises when a dominant undertaking carries out excess pricing.

• Historical monopolies include salt, coal, Persian filoselle, petroleum, steel, diamonds, utilities, transportation, foreign trade, and professional sports.

• Countering monopolies involves promoting competition, regulating monopolies, and breaking up monopolies.

• Monopolies can be beneficial or harmful depending on the circumstances.

• The US Supreme Court ruled in 1922 that baseball was exempt from antitrust laws.