3.4.5 Monopoly

Question 1

what is a monopoly?

Answer 1

where there is a single seller in the market or any firm having more than 25% market share

Question 2

characteristics of a monopoly?

Answer 2

• no substitute products
• the firm has complete market power + can set prices + control output –> allows SNP in the SR + no LR effects as there’s no competition
• high barriers to entry

Question 3

what is third degree price discrimination?

Answer 3

when a firm charges different prices for different consumers for the same good/service

Question 4

what are the sub divides for price discrimination

Answer 4

• time
• age
• geographical location
• income

Question 5

what conditions must be met for third degree price discrimination to occur?

Answer 5

• market power –> firm must be able to change prices - works best with no substitutes
• varying consumer price elasticity of demand –> some consumers will be willing to pay more
• ability to prevent resale of tickets

Question 6

what are the costs and benefits to consumers of third degree pricing?

Answer 6

• many will lose out as they pay higher prices
• others will benefit from lower prices
  -some consumers will gain as a higher price decreases the quantity demanded & in some markets this can increase consumer utility

Question 7

costs and benefits of third degree pricing for producers?

Answer 7

• total rev increases –> higher profit
• increase of producer surplus at the cost of decrease in consumer surplus
• increase average costs because of price discrimination

Question 8

advantages of monopoly to firms

Answer 8

• SNP for continued investment e.g. new tech
• EoS increase = lower average costs
• producer surplus increase
• price discrimination can increase revenue
• market power –> more global competitiveness

Question 9

disadvantages of monopoly to firms

Answer 9

• little comp - reduction in efficiency
• cross subsidisation = inefficiencies
• miss allocation of resources as P > MC
• lack of innovation due to little comp

Question 10

advantages of monopoly to employees

Answer 10

SNP = higher wages

Question 11

disadvantages of monopolies to employees

Answer 11

having only 1 supplier in the country can limit the opportunity to change employers

Question 12

advantages of monopolies to consumers

Answer 12

• better quality products due to SNP being used for innovation
• cross subsidisation = lower prices
• prices may fall if firms pass on their cost savings from EoS in the form of lower product prices

Question 13

disadvantages of monopolies on consumers

Answer 13

• higher prices = no substitute products available
• low comp –> no innovation and worse product quality over time
• worse customer service
• cross subsidisation = likely increase prices on some products
• consumer surplus decreases

Question 14

advantages of a monopoly on suppliers

Answer 14

• increased sales volume

Question 15

disadvantages of monopoly on suppliers

Answer 15

• less competition for their products and the monopolist will probably have the power to dictate what price they pay
• this price may not be profitable in the LR

Question 16

what is a natural monopoly

Answer 16

• when the most efficient number of firms in the market is 1