3.4.5: Monopoly

Question 1

What is a pure monopoly?

Answer 1

A market where one firm is the sole seller of a product.

Question 2

What is a working monopoly?

Answer 2

A market where a firm has at least 25% of market share.

Question 3

What is an example of a pure monopoly?

Answer 3

Google owns 88% of market share.

Question 4

What is an example of a working monopoly?

Answer 4

Tesco own 28% of market share.

Question 5

What are the sources of monopoly power?

Answer 5

-Barriers to entry: the higher the barriers to entry, the easier it is for a firm to consolidate monopoly power.
-Product differentiation: the more unique a product seems, the less competition a firm faces.
-Advertising: increases brand loyalty.

Question 6

What are examples of barriers to entry?

Answer 6

-Limit pricing (setting prices below the production costs for new firms).
-High set-up costs.
-Brand loyalty (to existing firms).

Question 7

Where is the profit maximising equilibrium (monopoly)?

Answer 7

MR = MC.

Question 8

When can a monopoly make supernormal profit?

Answer 8

In the short run and the long run.

Question 9

What is price discrimination?

Answer 9

When a business charges different consumers different prices for the same product.

Question 10

What is 1st degree price discrimination (with example)?

Answer 10

Charging different prices for each unit purchased (i.e. based on one’s willingness to buy).
Example: market haggling.

Question 11

What is 2nd degree price discrimination (with example)?

Answer 11

Prices varying by quantity sold.
Example: phone minutes.

Prices varying by time of purchase.
Example: plane tickets at holiday times.

Question 12

What is 3rd degree price discrimination (with example)?

Answer 12

Charging prices to groups of consumers (segmented by PED, location, income, age, gender, etc.)
Example: student discounts.

Question 13

What are the conditions for (3rd degree) price discrimination?

Answer 13

-Firms have monopolistic market power.
-Ability to separate different groups.
-Identifying consumers with different PED.
-Ability to prevent re-sale.

Question 14

What does (3rd degree) price discrimination look like in a graph (inelastic market and elastic market)?

Answer 14

Question 15

Why do firms make more supernormal profit in an inelastic market than in an elastic market?

Answer 15

For inelastic markets, consumers have a high willingness to pay, whereas in elastic markets, consumers are responsive to small changes.

Question 16

What are benefits of (3rd degree) price discrimination?

Answer 16

-Some customers may pay less. Potential for cross subsidy of activities that bring social benefits (e.g. lower prices for drugs in low-income countries).
-Brings new consumers into elastic markets, who would otherwise be excluded by a ‘normal’ higher price (e.g. student discounts).
-Firms increase their profits which can go into R&D (improving dynamic efficiency).

Question 17

What are costs of (3rd degree) price discrimination?

Answer 17

-Consumers lose some of their consumer surplus to the producers and some consumers have to pay a higher price.
-Possible use as a limit pricing tactic, acting as a barrier to entry to rival firms. This reinforces the monopoly power of existing firms.

Question 18

What is a natural monopoly (with example)?

Answer 18

A market where the most efficient number of firms in an industry is likely to be one.
Example: railways.

Question 19

Natural monopoly graph:

Answer 19

Question 20

What are the costs and benefits of monopolies for consumers?

Answer 20

+Consumers could benefit from a net welfare gain due to cross subsidisation, if they receive a lower price.
+Some consumers can access goods & services with positive externalities that they may not have been able to access before (e.g. drugs).
-Consumers may pay ​higher prices and see a ​poorer quality service​, due to a lack of competition.
-There is ​less choice​ for consumers, since there is only one firm producing the good.

Question 21

What are the costs and benefits of monopolies for firms?

Answer 21

+Supernormal profits means firms will have finance for investments, and will be able to build up ​reserves to overcome short term difficulties​.
+Maximise economies of scale, reducing costs and increasing profit further.
-Firms may ​not always choose to profit maximise ​due to X-inefficiencies, sales or revenue maximising or contestability leading to limit pricing.
-Lack of competition ​may mean that firms become complacent and so they may not make maximum profits.

Question 22

What are the costs and benefits of monopolies for workers?

Answer 22

-Monopolists produce at lower outputs, so will employ fewer workers.
-The inefficiency of the monopoly may mean employees receive higher wages, particularly directors and senior managers.
-Sales/revenue maximising may mean output is higher and so more employees are employed.

Question 23

What are the costs and benefits of monopolies for suppliers?

Answer 23

-For suppliers, the impact of a monopolist will depend on the extent to which the monopolist is also a monopsonist​. If the monopolist buys all or most of the suppliers’ goods (so is a monopsonist), it will reduce the suppliers’ profits as the monopolist will decrease prices.

Question 24

(Monopoly) In the long term, are firms:
-Allocatively efficient?
-Productively efficient?
-Dynamically efficient?

Answer 24

-No.
-No.
-Yes.

Question 25

What is an example of price discrimination?

Answer 25

Slug & Lettuce charge 20p more per pint at their pubs at on-peak times.