19 Monopoly Flashcards
monopoly
situation in where there is a single seller in a market with no competitors
conditions of a monopoly
- a single seller in a market
- barriers to entry - cant compete in a monopoly market
- barriers to exit - difficult to exit the market without making a loss
- price maker - can choose the price in the market and is likely to choose a price higher than a competitive market
- no close substitutes - nature means that it is difficult for customers to substitute the product for anything else
- supernormal profit - in both short run and long run
dynamic efficiency
incentive to innovate products and processes to become productively efficient in the long run
- in perfectly competitive market there is little incentive to innovate because other firms can adopt the innovation quickly
- in a monopoly the barriers to keep new entrants out the firms can innovate and gain supernormal profits in the long run
X-inefficiency
lack of incentive to reduce costs
- under perfect competition every firm needs to keep its costs as low as possible to be able to sell at lowest possible price
- monopoly does not have this pressure and won’t look to keep costs as low as possible
advantages of a monopoly
- can be dynamically efficient - more profit more innovation
- gain economies of scale reducing average costs
- may be able to compete internationally
- supernormal profits can be reinvested creating more jobs and new products
- potential of becoming a monopoly may incentivise a firm to be more successful
- can avoid duplication of effort - inefficient to run two rail companies
disadvantages of a monopoly
- high prices for consumers
- X-inefficiency leading to higher average costs
- less incentive to innovate due to a lack of competition
- a monopoly can be so large that it suffers from diseconomies of scale
- less choice for consumers
- allocatively inefficient
- productively inefficient
Natural monopoly
type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable
- long run marginal cost curve remains below the long run average cost curve
advantages and disadvantages of a natural monopoly
same as a monopoly
- advantage of economies of scale is so great that it may be logical for government to allow monopoly to exist
- government may need to step in and regulate the market