3.4.5 - Monopoly Flashcards
Name all the characteristics of a monopoly
- One firm in a market
- High barriers to entry
- Imperfect information
- Profit maximisers MC = MR
When is a firm legally consider a monopoly ?
- When a firm controls over 25% of the market share.
Examples of a monopoly
- Google : 84% of market share of the search engine market in the UK
- Facebook : Facebook including instagram has 63% of the social media market share in the UK
- Spotify : Spotify has 30% of music streaming market in the UK
What are all the barriers to entry ?
Monopoly diagram
Normal cost and revd diagram
In terms of efficiency how do monopolies operate ?
- Productively inefficient
- Allocatively inefficient
- X-inefficient
- Dynamically efficient
Advantages of a monopoly power.
- Dynamic efficiency : Monopolies make supernormal profits which can be reinvested to be dynamically efficient. This will benefit consumers – better products or lower prices if technological advances reduce average costs. It may be in the firm’s interest to invest in innovation if ideas can be patented. This will help the firm to maintain monopoly power.
- Economies of scale : Monopoly firms may be able to take advantage of economies of scale, which means average costs will be lower than those of a competitive firm, this could be passed onto consumers in the form of lower prices, increasing consumer surplus. This is especially the case when there is a natural monopoly.
Absence of competition does not mean abuse of power.
Disadvantages of monopolies
Talk about how inefficient they are.
Evaluate monopolies : Explain what you would write in an exam/points you may use
why does the government support and own monopolies, if we know monopolies are productively, allocatively and X-inefficient?
Due to natural monopolies.
A natural monopoly is when it’s naturally most efficient if only one firm is in the market.
E.g. with public transport, it would be very inefficient if London had multiple transport networks, it’s most efficient to have just one (like TFL) in control of everything
Why do natural monopolies exist ?
- Due to high sunk costs.
- Huge internal economies of scale
- So it’s most efficient if only one firm is in the market:
How does Thames water act like a natural monopoly ?
How does TFL water act like a natural monopoly ?
They have high sunk cost e.g training staff which has been estimated as high as £129bn. So it would be inefficient if a second transport firm entered the market and duplicated this cost.
and TFL can benefit from economies of scale
Draw a natural monopoly diagram where there is no gov intervention
without government intervention prices are likely to be high and the output is low. Meaning the firm is not productive or allocatively efficient. It would be impossible to charge an allocatively efficient price (P=MC) without making a loss due to high costs.
Efficiencies for an monopoly market
Not all firms can practice 3rd degree price discrimination, how comes ?
As conditions need to be met.
1. The firm must have market power :
2. The markets must have different elastict.
3. Limit reselling : People can buy at the cheaper price and re sell to other consumers for a higher price they bought it at. The consumer will then not buy from the original producer so that firm then loses out on profit.
4. Firms need to have information on which consumers are elastic and which aren’t.
How do firms practice price discrimination ?
Price discrimination diagram
In the railway market how might firms price discriminate ?
