11- Monopoly Flashcards
Monopoly
One seller dominating the market.
Legal monopoly
One firm dominates 25% or more of the market.
Pure monopoly
Involves one firm alone dominating the market.
Product homogenity?
Differentiated products- firms are price makers
Barriers to entry/exit?
High barriers to entry/exit.
Knowledge/information?
Imperfect knowledge/ information
Firm objectives
Profit maximisers- MC=MR
Allocative efficiency?
No- P>MC (under allocation)-
- high prices
- restriction of output
- consumers exploited
- low choice
- low competition could = low quality
Productive efficiency?
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
X efficiency?
X inefficiency- produce above AC (extra costs/waste)
Why is there X inefficiency in a Monopoly?
- Complacency caused by lack of competitive drive- they can just set high prices to cover costs.
- Difficult process to cut costs
Dynamic efficiency?
Yes- supernormal profits
- Imperfect information
- High barriers to entry
In the long run interest of consumers and the business
Benefits of monopolies for consumers?
- 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
Costs of monopolies for consumers?
- Less choice- large firms keep brands to make most profit.
- Higher prices
- Lower quality- due to low competition
Benefits of monopolies for governments?
- 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
Costs of monopolies for governements?
- 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.
Benefits of monopolies for workers?
- Monopolies might offer better job security
- Higher profits may mean higher bonuses/perks for workers
Costs of monopolies for workers?
- 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.
Benefits of monopolies for other firms such as suppliers?
- 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.
Cost of monopolies for other firms such as suppliers?
- 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.
3 degree price discrimination?
Charging different prices to groups of consumers segmented by price elasticity of demand, income, age, sex etc.
Conditions for price discrimination
- Firms must have sufficient monopoly power
- Must be able to identify different market segments
- Ability to separate different groups
- Ability to prevent resale
Aim of price discrimination
Higher profit
Examples of price discrimination?
- Train
- Cinema tickets
- Taxi fares
- Phone contracts
