3.4.5 Monopoly Flashcards
What are three characteristics of a monopoly
1- Firm has more than 25% of total market sales
2- Price setting power
3- High entry and exit barriers
Where is the profit maximising equilibrium of a monopoly
- Where MC=MR
What are some benefits of a monopoly to a firm
- Monopolies being price setters, owners will benefit from higher levels of supernormal profits via dividends
- Monopolies should be able to achieve economies of scale as they dominate the market
- Monopolies should be able to compete internationally
What are some negatives of a monopoly to a firm
- Monopolies may face greater scrutiny and regulation
- Monopolies may experience diseconomies of scale, due to communication issues
What are some benefits of monopolies to consumers
- Consumers can benefit from R and D
- Consumers may gain lower prices via economies of scale
What are some negatives of monopolies to consumers
- Consumers may suffer from higher prices, which will lead to allocative inefficiency and loss of consumer surplus
- Consumers may lack a choice of quality products
What are some benefits of monopolies to employees
- Employees may benefit from high levels of job security as the firm is expanding FOPs
- Employees may gain higher wages and bonuses
What are some negatives of monopolies to employees
- Employees may have fewer employment opportunities due to monopolies restricting output and a lower derived demand for labour
- Employees may be exploited by lower wages as there arent enough firms willing to take on workers
What are some benefits of monopolies to suppliers
- Suppliers may benefit from higher sales and profits
- Suppliers may benefit from a long term relationship which can prove to be a strong long term stream of revenue
What are some negatives of monopolies to suppliers
- Suppliers may be exploited as they may be the only firm buying from the supplier, therfore a higher bargaining power
What is the definition of price discrimination
- When a firm sells the same product, at a different price in different markets
What are the conditions of price discrimination
- Two distinguishable markets with different PEDs
- Market Power
- No arbitrage
What are some of the aims of price discrimination
- Increase market share
- To make more efficient use of spare capacity
- To generate cash flow during times of recession
What is 3rd degree price discrimination
- Charging different prices to two groups with different PED
Draw the third degree price discrimination diagrams
- Correct diagram drawn with labels
What are the cons of price discrimination to consumers
- Allocative inefficiency as firms are charging way over MC
- Can widen income inequality people with low incomes may be apart of the income inelastic market
What are the benefits of price discrimination to consumers
- Cross subsidisation, lower priced products are still availabvle
- Some elastic consumers may benefit from lower price
What are the benefits of price discrimination to firms
- May lead to EcoS due to higher output
- Dynamic efficiency due to higher levels of SNP
What are some of the disadvantages of PD to firms
- Higher administrative costs such as marketing and research as they must segment a market
- May receive scrutiny from regulatory bodies as it may be abusing monopoly power
What is the definition of a natural monopoly
- The situation where only one firm can benefit from full economies of scale .
What are the characteristics of a natural monopoly
high fixed cost
High levels of economies of scale
Rational for 1 firm to supply the entire market
Why is there only one supplier in a natural monopoly ?
- Competition is undesirable as there are massive fixed costs
Why are natural monopoly’s subsidised by the government ?
- Natural monopolies are regulated in order to set price at allocative effeciency, eg MC=AR
- Subsidised in order to allow firms to make normal profit
What will an increase in variable costs cause for a monopoly
- Increase in AC and MC q
What will an increase in fixed costs cause for a monopoly
- Only increase in AC
