3.4.5 Monopoly Flashcards
Characteristics of a monopoly
- One buyer (unrealistic)/Firm has more 25% market-share
- Differentiated goods
- high barriers to entry
- asymmetric information
- profit maximiser (MC=MR)
- Dynamically efficient
Why is there a loss in societies surplus when a firm is acting as a monopoly
Prices are put to a level that limits consumer surplus
Firms produce where MC=MR which reduces their output and creates a smaller producer surplus
Describe the graph for a monopoly
Deadweight loss - loss in producer + consumer surplus
What is price discrimination
where a firm charges different prices to different consumers for an identical good/service with no difference in cost of production
What are the necessary conditions for price discrimination
- Price making ability
- Information to separate market by PED
- Prevent Re-sale
describe 3rd-degree price discrimination
•Due to a range of factors e.g. age, income, PED between consumers can differ, hence a business could exploit this and charge different prices for the same good
What are the cons the 3rd-degree price discrimination?
Large allocative inefficiency due to high prices of elastic segment
Inequalities between customers being charged the same price
anti-competitive pricing of elastic segment push competition out of the market
What are the pros to 3rd-degree price elasticity
Some consumers benefit from lower prices in elastic segment,
dynamic efficiency leading to more investment and better quality
economies of scale could lead to lower prices
What are the cons to a monopoly
Allocative inefficiency leading to higher prices = lower consumer surplus and lower output and choice from firm
Productively inefficient forgoing economies of scale as not minimising costs
x-inefficient leading to wastage in their production
inequalities in necessity markets
What are the pros to a monopoly
Dynamic efficiency: innovation leading to high-quality product leading to beating rival and increasing market share
greater economies of scale due to size which could increase output at lower costs
can breed efficiency in natural monopolies
cross subsidisation when price discriminating
Evaluate a monopoly
- Is dynamic efficiency going to occur?
- EoS/DoS depend of firm
- Is profit max key objective?
- Regulatory bodies?
- Price discrimination?
- Strong competition?
- Type of good/service sold?
Characteristics of a natural monopoly
Huge fixed cost and high start-up costs
Large potential for economies of scale
1 firm supplies who market
Competition would result in a wasteful depletion of resources
Characteristics of a natural monopoly
Huge fixed cost and high start-up costs
Large potential for economies of scale
1 firm supplies who market
Competition would result in a wasteful depletion of resources
How can regulation allow a natural monopoly to be allocatively + productively efficient
- Without it Qm show high prices and low quantities
- In a competitive market LRMC = AR (S=D) which is allocative efficient, shown by Qc
- Regulation can push output to allocatively efficient levels but this would be creating levels of subnormal profit
- Instead a subsidy is given by regulator to make sure loss is covered
