The analytical picture of monopolies presented in our last lecture may be too simple. Monopolies may not always charge the same price to every customer – they can choose to charge different prices, a phenomenon known as price discrimination. Monopolies are regulated by governments to limit their market power, yet in some cases governments may encourage the operation of monopolies. These cases are discussed in greater detail in this lecture.
The U.S. Department of Justice enforces antitrust laws. Image courtesy of John Taylor on Flickr.
Keywords: Monopoly; price discrimination; natural monopolies; price regulation; antitrust policy; mergers; contestable markets.
Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [R&T] Chapter 10, “Monopoly.”
- [R&T] Chapter 16, “Antitrust Policy and Business Regulation.”
- [Perloff] Chapter 11, “Monopoly.” (optional)
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
Which of the following descriptions corresponds to a natural monopoly?
These descriptions are synonymous and all describe a firm that is likely to be a natural monopoly: firms such as utilities or large extraction industries in which the fixed costs far outweigh the marginal costs.
What is an example of a firm using signals from consumers to gauge their willingness to pay and thus price discrimination?
Given that senior citizens and students generally have lower disposable income, firms can offer them a discount and thus induce them to purchase a product without losing revenue on higher-income customers (who still pay full price). Firms set price equal to marginal cost if they operate in a competitive market, and will choose to be more capital- or labor-intensive based on the ratio of input prices. Advertising decisions are also irrelevant to price discrimination.
What is the potential advantage of a patent system?
The correct answer is that a patent system encourages innovation, by increasing the profits available in the development of a new product. It does not drive the price to the competitive equilibrium, raise the level of output, or eliminate a monopoly. Instead, patent protection creates an artificial monopoly for the life of the patent.
What is the main challenge in implementing a regulatory system that caps the monopoly price at the competitive market price?
The correct answer is that it is challenging to accurately estimate what the competitive market price is. This would require accurately estimating the shape of both the supply and demand curves. The other problems mentioned may also be factors, but they are generally less important.
These optional resources are provided for students that wish to explore this topic more fully.
Textbook Study Materials
See the [Perloff] chapter for the topics covered, as well as quizzes, applications, and other related resources.