11- Monopoly

Question 1

Monopoly

Answer 1

One seller dominating the market.

Question 2

Legal monopoly

Answer 2

One firm dominates 25% or more of the market.

Question 3

Pure monopoly

Answer 3

Involves one firm alone dominating the market.

Question 4

Product homogenity?

Answer 4

Differentiated products- firms are price makers

Question 5

Barriers to entry/exit?

Answer 5

High barriers to entry/exit.

Question 6

Knowledge/information?

Answer 6

Imperfect knowledge/ information

Question 7

Firm objectives

Answer 7

Profit maximisers- MC=MR

Question 8

Allocative efficiency?

Answer 8

No- P>MC (under allocation)-

• high prices
• restriction of output
• consumers exploited
• low choice
• low competition could = low quality

Question 9

Productive efficiency?

Answer 9

No- not on lowest point on AC curve
Right/rising side of AC- diseconomies of scale
Left/falling side of AC- forging economies of scale

Question 10

X efficiency?

Answer 10

X inefficiency- produce above AC (extra costs/waste)

Question 11

Why is there X inefficiency in a Monopoly?

Answer 11

• Complacency caused by lack of competitive drive- they can just set high prices to cover costs.
• Difficult process to cut costs

Question 12

Dynamic efficiency?

Answer 12

Yes- supernormal profits
- Imperfect information
- High barriers to entry
In the long run interest of consumers and the business

Question 13

Benefits of monopolies for consumers?

Answer 13

• Innovation- news ideas can be taken on due to being able to take the risk of not working.
• Research and development
• Investment- monopolies believe they will reap the rewards of investment

Question 14

Costs of monopolies for consumers?

Answer 14

• Less choice- large firms keep brands to make most profit.
• Higher prices
• Lower quality- due to low competition

Question 15

Benefits of monopolies for governments?

Answer 15

• Large firms pay higher rates of cooperation tax
• Monopolies may have competition outside the country
• Monopoly power helps to keep jobs within the country and may improve balance of payments

Question 16

Costs of monopolies for governements?

Answer 16

• Monopolies can find it easier to avoid tax, and employ tax consultants to help them do so.
• Inequality tends to increase, as the rich get richer.

Question 17

Benefits of monopolies for workers?

Answer 17

• Monopolies might offer better job security

- Higher profits may mean higher bonuses/perks for workers

Question 18

Costs of monopolies for workers?

Answer 18

• Lack of bargaining power for workers. A worker can’t move to another firm in the industry because there is just one employer. Leads to lower wages.
• Higher profits could lead to investment into capital replacing workers.
• Doesn’t necessarily guarantee more job security than in more competitive industries.

Question 19

Benefits of monopolies for other firms such as suppliers?

Answer 19

• A monopoly can offer a secure outlet for suppliers- keeps the orders rolling in for.
• Firms which buy from monopolies might be more likely to have consistent quality. It’s not worth a monopoly taking risks with the quality of a well-known brand, as there is too much to lose.

Question 20

Cost of monopolies for other firms such as suppliers?

Answer 20

• Firms which buy from monopolies can be exploited (with price and range).
• Other firms can be deliberately forced out of the market (by limit of predatory pricing) because they have not had the chance to establish themselves.

Question 21

3 degree price discrimination?

Answer 21

Charging different prices to groups of consumers segmented by price elasticity of demand, income, age, sex etc.

Question 22

Conditions for price discrimination

Answer 22

• Firms must have sufficient monopoly power
• Must be able to identify different market segments
• Ability to separate different groups
• Ability to prevent resale

Question 23

Aim of price discrimination

Answer 23

Higher profit

Question 24

Examples of price discrimination?

Answer 24

• Train
• Cinema tickets
• Taxi fares
• Phone contracts