3.4.5

Question 1

Characteristics of monopoly

Answer 1

• profit maximisation
• sole seller
  -high barriers to entry
• price maker
• price discrimination

Question 2

What percentage of market share do you need for a firm to abbé monopoly power

Answer 2

In the UK, when one firm dominates the market with more then 25% market share, the firm has monopoly power

Question 3

What factors are monopoly power influenced by

Answer 3

• barriers to entry
• economies of scale
• limit pricing
• owning a resource
• sunk costs
• brand loyalty
• set-up costs
• the number of competitors
• advertising
• the degree of product differentiation

Question 4

Profit maximising equilibrium

Answer 4

A monopolist earns supernormal profits in both the short run and the long run
At the point MC=MR

Question 5

When does price discrimination occur

Answer 5

Price discrimination occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices, for the same good or service. This is not for the cost reasons

Question 6

How can monopolists maximise their overall profits

Answer 6

By charging different prices (third degree discrimination)

Question 7

Third degree price discrimination

Answer 7

When different groups of consumers are charged a different price for the same good or service

Question 8

Consumer costs of a monopoly

Answer 8

Price discrimination results in a loss of consumer surplus
P>MC
Loss of allocative efficiency
Strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers

Question 9

Consumer benefits of a monopoly

Answer 9

Consumers could benefit from a net welfare gain as a result of cross subsidisation, if they revive a lower price
Some consumers, who were previously excluded by high prices, might now be able to benefit from the good or service

Question 10

Producer costs of a monopoly

Answer 10

• if it is used as a predatory pricing method, the firm could face investigation by the competition and markets authority
• it might cost the firm to divide the market, which limits the benefits they gain

Question 11

Producer benefits of a monopoly

Answer 11

• producers name better use of spare capacity
• the higher supernormal profits, which result from price discrimination, could help stimulate investment
• if profits are made in one market, a different market which makes losses could be cross subsidised, especially if it yields social benefits
  This will limit or prevent job losses, which might result from the closure of the loss- making market

Question 12

Costs of monopoly to firms, consumers, employees and suppliers

Answer 12

• the basic model of monopoly suggests that higher prices and profits and inefficiency may result in a model misallocation of resources compared to the outcome in a competitive market
• monopolies could exploit the consumer by charging them higher prices. This means the good is under-consumed, so consumer needs and wants are not fully met. This loss of allocative efficiency is a form of market failure
• monopolies have no incentive to become more efficient, because they have few or no competitors, so production costs are high
• there is a loss of consumer surplus and a gain of producer surplus. If a monopolist raises the market price above the competitive equilibrium level, output will fall. Leads to gain in producer surplus
• consumers do not get as much choice in a monopoly as they do in a competitive market

Question 13

Natural monopoly

Answer 13

A natural monopoly arises when there are high fixed costs, usually in the form of infrastructure
The costs of infrastructure are a form of sunk costs, since the costs are not recoverable if the firm decided to leave the market
This makes barriers of entry to and exit from the market high
It is considered inefficient to duplicate this infrastructure by trying to make the market more competitive- this is because resources are being wasted