Monopoly, Price Discrimination and Market Power: every key term you need (+ practice quiz)
25 flashcard terms for Intermediate Microeconomics Topic 7, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A market with a single seller of a product having no close substitutes. The monopolist faces the entire market demand curve, so its output choice and its price choice are one decision.
Market power
The ability to raise price above marginal cost without losing all sales. It exists on a spectrum and stems from differentiation, barriers to entry or control of an essential input.
Barriers to entry
Features that prevent rivals from competing away profit, including patents, licences, control of a key resource and large fixed costs relative to market size.
Natural monopoly
A market where one firm can serve total demand more cheaply than several, because average cost falls over the entire relevant range. Competition here would duplicate costly infrastructure.
Marginal revenue under downward-sloping demand
Selling one more unit requires cutting price on all units, so revenue rises by less than the price. Marginal revenue therefore lies strictly below the demand curve at every positive quantity.
Monopoly output rule
Produce where marginal revenue equals marginal cost, then charge the price the demand curve supports at that quantity. Price exceeds marginal cost because marginal revenue is below price.
Markup pricing formula
The optimal price exceeds marginal cost by a proportion tied to the inverse of the demand elasticity. Facing more elastic demand, the firm must price closer to marginal cost.
Elastic region operation
A monopolist never chooses a quantity where demand is inelastic, since raising price there would increase revenue and cut cost simultaneously. Optimal output always lies in the elastic range.
Lerner index
The gap between price and marginal cost expressed as a fraction of price, a standard scalar measure of market power. It equals the reciprocal of the elasticity at the optimum.
Deadweight loss of monopoly
The surplus lost because output is restricted below the level where price equals marginal cost. Units valued above their resource cost go unproduced purely to sustain a higher price.
Monopoly and the absence of a supply curve
A monopolist has no supply curve because quantity is not a function of price alone; the chosen pair depends on the whole shape of demand, not just its height.
Rent seeking
Real resources spent lobbying for or defending a protected position. Because these outlays produce nothing, they can raise the social cost of monopoly beyond the deadweight triangle.
Price discrimination
Charging different buyers different prices for essentially the same good for reasons unrelated to cost. It requires market power, distinguishable buyers and a way to prevent resale.
First-degree price discrimination
Charging each buyer exactly her willingness to pay, which extracts all surplus. Output is efficient because the last unit is sold at marginal cost, yet consumers gain nothing.
Second-degree price discrimination
Offering a menu of options such as quantity discounts or quality tiers and letting buyers sort themselves. It works when types cannot be observed but choices reveal them.
Third-degree price discrimination
Charging different prices to observable groups such as students or seniors. The optimum equalises marginal revenue across groups, so the more elastic group pays less.
Resale prevention requirement
Discrimination collapses without it, since low-price buyers would resell to high-price buyers. Services, personalised goods and geographically separated markets are naturally protected.
Two-part tariff
A fixed access fee plus a per-unit price. Setting the unit price at marginal cost and the fee equal to the resulting consumer surplus captures the gains while keeping output efficient.
Bundling
Selling goods together at a single price. It raises profit when buyers value the components in negatively correlated ways, because bundling compresses the dispersion of willingness to pay.
Self-selection constraint
The requirement that each buyer type prefers the option designed for it over the others. Menus must respect it, which typically forces the seller to leave surplus with high-value buyers.
Peak load pricing
Charging more when capacity is strained and less off peak. It reflects the genuinely higher marginal cost of peak service and spreads demand across the day.
Marginal cost pricing regulation
Forcing a monopolist to price at marginal cost restores efficient output but generates losses for a natural monopoly whose average cost is falling, so a subsidy becomes necessary.
Average cost pricing regulation
Setting price at average cost lets a natural monopoly break even without subsidy, at the cost of some remaining restriction of output relative to the efficient level.
Rate of return regulation
Permitting a fixed return on the capital base. It creates an incentive to over-invest in capital because a larger base mechanically permits larger allowed earnings.
Contestable market
A market where entry and exit are costless, so even a single incumbent must price near average cost to deter hit-and-run entry. The threat of competition substitutes for its presence.