3.4.5 - Monopoly

Question 1

What is a monopoly?

Answer 1

a market structure in direct contrast to perfect competition. higher price, lower quantity - inelastic PED

Question 2

What are the market characteristics of a monopoly?

Answer 2

1) strong price-making ability
2) limited (only 1) product
3) high entry and exit barriers
4) imperfect knowledge

Question 3

What is a pure monopoly?

Answer 3

1 firm is the whole market
CR1 = 100%

Question 4

What is a legal monopoly?

Answer 4

> 25% market share (CR1 = 25%)

Question 5

What power does a monopolist have?

Answer 5

the monopolist has the power to be a “price-maker”. it will sell whatever quantity consumers will buy at that price (inelastic - demand = AR). if it produces at MC=MR, it could profit maximise.

Question 6

Monopoly in SR and LR

Answer 6

there’s no difference between SR and LR, high barriers to entry mean nobody can steal their profit even in LR

Question 7

Are monopolies efficient?

Answer 7

Allocatively efficient (P=MC) -> NO
Productively efficient (min AC) -> NO

Question 8

What are structural barriers to entry?

Answer 8

aren’t deliberately created by existing firms

Question 9

Monopoly structural barriers to entry

Answer 9

• capital/infrastructure costs and expertise - high start-up costs
• economies of scale - such as a natural monopoly, scale so big only one firm can survive

Question 10

What are behavioural barriers to entry?

Answer 10

deliberately put up by firms to create higher barriers to entry

Question 11

Monopoly behavioural barriers to entry

Answer 11

• legal restrictions - patents (25 years), copyrights
• control of a scarce resource or input
• asymmetric information- existing firms know tricks of the trade, new firms don’t have expertise
• advertising - increased ad budget, new firms can’t compete and are put off
• brand proliferation - lots of similar products by one company - ‘filling’ all gaps in the market

Question 12

Monopoly barriers to exit

Answer 12

• redundancy - either too labout intensive or highly paid workers
• disposal of equipment - pharmaceuticals, chemicals etc
• SUNK COSTS - ‘non-recoverable costs’, money that can’t be recovered on exit (advertising, research and development)

Question 13

What is price discrimination?

Answer 13

when a producer sells the same product to different consumers at different prices - monopolists can do this.

Question 14

Conditions for price discrimination

Answer 14

1) the firm must be a “price-maker”, high barriers to entry and a degree of monopoly power
2) different PED’s in different markets (charge more to inelastic consumers)
3) resale preventable

Question 15

3rd degree price discrimination

Answer 15

charge inelastic customers higher prices and increase total profit, different prices for different PED’s

Question 16

Price discrimination welfare gains for consumers

Answer 16

cross-subsidisation (for example, pro-bono legal work), low price for a MC of a consumer is ‘worth it’, new consumers are priced into the market

Question 17

Effects of price discrimination

Answer 17

• consumer surplus decreases -> loss of welfare, exploitation
• increase revenue and profits for the monopolist, extracting consumer surplus and turning it into supernormal profit
• predatory pricing tactic to harm competition
• however, makes market more contestable
• LR - reinforces monopoly dominance, doesn’t help consumers

Question 18

Monopoly advantages

Answer 18

• supernormal profit
• monopoly power
• cross-subsidisation
• price discrimination
• efficiency: dynamic vs. static
• duplication

Question 19

Monopoly disadvantages

Answer 19

• supernormal profit
• monopoly power
• cross-subsidisation
• price discrimination
• efficiency
• X-inefficiency
• duplication