3.4.5- Monopoly

Question 1

What is a pure monopoly?

Answer 1

When one firm is the sole seller of a product in a market

Question 2

What is one of the closest examples of a monopoly?

Answer 2

Google which owns 88% of the market

Question 3

What is a legal monopoly in the uk?

Answer 3

A firm that has over 25% market share

Question 4

What are the characteristics of a monopoly?

Answer 4

-many buyers and one seller
-price maker
-unique/highly differentiated product
-high barriers to entry/exit
-independent decision making
-imperfect information

Question 5

How does a monopolist behave in price?

Answer 5

Higher prices as no competition

Question 6

How does a monopolist behave in level of output?

Answer 6

Lower so they can keep prices higher

Question 7

How does a monopolist behave in business objectives?

Answer 7

-profit max
-creating high barriers to entry

Question 8

How does a monopolist behave in product innovation?

Answer 8

-don’t need to innovate as there is no competition
-schumpeter said they would innovate as they have a high snp

Question 9

How does a monopolist behave in production costs?

Answer 9

-higher as isn’t productively efficient, may be x-inefficient

Question 10

How does a monopolist behave in merger and acquisition activity?

Answer 10

-lots of integration as monopolies have high snp and merge with smaller cheap firms to eliminate competition

Question 11

How does a monopolist behave in productive/ allocative efficiency?

Answer 11

Not efficient as they profit maximise

Question 12

How does a monopolist behave in barriers to entry/exit?

Answer 12

High barriers

Question 13

What is x-inefficient?

Answer 13

Operating above SRAC

Question 14

What is price discrimination?

Answer 14

When a firm charges a different price to different consumers in a market for the same product

Question 15

What is first degree price discrimination?

Answer 15

Charges a different price to every consumer based on their WTP (willingness to pay)

Question 16

What is second degree price discrimination?

Answer 16

Charges a different price based on the volume that a consumer buys

Question 17

What is third degree price discrimination?

Answer 17

Charges different prices to different market segments

Question 18

What are some examples of market segments?

Answer 18

Age, income, peak and off peak, occupation

Question 19

What conditions must be true to price discriminate?

Answer 19

1. Different demand curve for each consumer group (different PED and WTP)
2. Must be able to distinguish between each group
3. Must be able to prevent resale between the market segments

Question 20

What is the impact of price discrimination on total SNP?

Answer 20

-snp will increase as SNP1+SNP2>SNP

Question 21

What is the impact of price discrimination on CPU?

Answer 21

Decreases due to economies of scale

Question 22

What is the impact of price discrimination on competitor firms?

Answer 22

High barriers to entry due to low prices which small firms can’t afford to charge

Question 23

What is the impact of price discrimination on the pattern of demand?

Answer 23

Can spread out demand by using price discrimination to encourage increased demand during low demand periods so decreased capital constraints and excess unused capacity

Question 24

What is the impact of price discrimination on number of market segments?

Answer 24

More Market segments to increase market dominance so firms can exploit monopoly power

Question 25

What is the impact of price discrimination on corporate social responsibility initiatives?

Answer 25

Can sell to vulnerable market segments using other profits by cross subsidising

Question 26

What is the impact of price discrimination on consumer choice?

Answer 26

Increased choice as lower income consumers can have access to lower prices

Question 27

What is the impact of price discrimination on overall economic welfare?

Answer 27

Increase CS and PS

Question 28

What is the impact of price discrimination on dynamic efficiency?

Answer 28

Can use profits for R+D to improve efficiency

Question 29

How can you evaluate price discrimination?

Answer 29

-WTP between market segments isn’t always very different
-many products have grey import markets so it’s impossible to prevent resale
-fake ids exist
-price discrimination is expensive
-unequal