3.4.5 - monopolies Flashcards
what is a monopoly
a type of market structure where there is only one dominant seller. they must have over 25% of the market share to be classified as one and the closest firm to exist as a pure monopoly is google with 88% market share
what are the characteristics of a monopoly
they have very high barrier to entry
what is third degree price discrimination and its necessary conditions
● This is when monopolists charge different prices to different people for the same good or service. There are different examples of where this can occur: different times of the day, for example peak and off-peak train times; different prices in different places, such as between London and smaller towns; and between different incomes, for example discounts for elderly people.
● In order for price discrimination to occur: the firm must be able to clearly separate the market into groups of buyers; the customers must have different elasticities of demand; and they must be able to control supply and prevent buyers from the expensive market from buying in the cheaper market.
describe 3rd degree price discrimination
The diagram shows the seperate markets for separate groups: those with inelastic demand and those with elastic demand. If the example was about travelling up to London, the workers would be the inelastic market since they have little choice other than to pay the increased price as they have to go to London to work, whilst shoppers are the elastic market since they can decide to shop elsewhere.
The diagram assumes the industry is a constant cost industry, in order to make it clearer. The firm produces where MC=MR in each market. Therefore, in the inelastic market they produce at Q1P1 and make supernormal profit of the orange area; in the elastic market they produce at Q2P2 and make supernormal profit of the purple area; and in the combined market they produce at Q3P3 and make supernormal profit of the yellow area. This shows that by price discriminating and having two separate markets, the inelastic market and the elastic market, rather than a combined market, the firm can make higher profits. The orange area plus the purple area is larger than the yellow area.
what are the costs and benefits of 3rd degree price discrimination
● Firms benefit since they are able to increase their profits. This can go into research and development, improving dynamic efficiency.
● Those in the elastic market gain as they are able to pay a lower price than they otherwise would; they benefit from cross subsidisation. These consumers may have been unable to access the good if it were not for the price discrimination and so this may increase equality. .
● Consumers lose some of their consumer surplus to the producers and some consumers have to pay a higher price.
what are natural monopolies
Some companies are said to be natural monopolies. In these industries, the
economies of scale are so large that even a single producer is not able to fully exploit all of them. These are decreasing cost industries. There are no pure natural monopolies in real life, but some examples include the National Grid, Royal Mail and National Rail.
what are the the costs and benefits of a monopoly in a market
● Monopolists have the potential to make huge profits for their shareholders through profit maximisation.
● Monopolists produce at lower outputs, so will employ fewer workers.
● However, the inefficiency of the monopoly may mean employees receive higher wages, particularly directors and senior managers. Profit satisficing or sales/revenue
maximising may mean output is higher and so more employees are employed
.
When firms enjoy economies of scale, they will be more efficient and customers will enjoy a higher consumer surplus.
what is efficiency like in a monopoly
● A monopoly is productively inefficient, since they don’t produce at MC=AC. They are also not allocative efficient as P>MC.
● Since a monopolist is likely to make supernormal profits, they will be dynamically efficient. However, if there is no competition, they may have no incentive to invest.
