3.4.5 Monopoly

Question 1

Monopoly market definition?

Answer 1

• A market with a single seller of a good

Opposite end of the spectrum to perfect competition

Question 2

Assumptions of monopoly model?

Answer 2

• Single seller of a good
• No substitutes
• High barriers to entry and exit

Question 3

Monopoly diagram?

Answer 3

• AR/Demand curve downward sloping - firms are price makers
• MR curve has gradient twice as steep as AR curve
• AR curve price elastic at top, price inelastic at bottom

Question 4

Third degree price discrimination?

Answer 4

• Partial price discrimination where individual consumers are paying different prices for the same product

Question 5

Three conditions under which a firm may be able to price discriminate?

Answer 5

• Firm must have market power
• Firm must have information ahout consumers and their willingness to pay (must be identifiable differences)
• Consumers must have limited ability to resell the product

Question 6

Market power condition for price discrimination?

Answer 6

• Price discrimination not possible in perf. comp. where no seller has influence over price so can only take place when firms have some ability to vary price

Question 7

Information condition for price discrimination?

Answer 7

• Needs to be able to identify diff groups of consumers with diff willingness to pay

Question 8

Limited ability to resell condition for price discrimination?

Answer 8

• If consumers able to resell product easily, will engage in arbitrage

Question 9

Why should a firm price discriminate?

Answer 9

• Firm is able to increase its profits

Gains more revenue from market with increased price (elastic demand) than it loses from market with lowered price (inelastic demand)

Question 11

Third degree price discrimination definition?

Answer 11

• Partial price discrimination where individual consumers pay different prices for the same product

Question 12

Three conditions under which a firm can price discriminate?

Answer 12

• Market power
• Information about consumers + their willingness to pay
• Limited ability to resell

Question 13

Market power condition for price discrimination?

Answer 13

• Price discrimination not possible under perfect competition as no firm has power to change prices, so firms need to have ability to vary prices

Question 14

Information condition for price discrimination?

Answer 14

• Firm needs to identify diff groups of consumers with diff willingness to pay

Question 15

Limited ability to resell condition for price discrimination?

Answer 15

• If consumers able to resell product easily = enagage in arbitrage

Question 16

Why should a firm price discriminate?

Answer 16

• Firm able to maximise its profits

Question 17

Example of price discrimination?

Answer 17

• NAPP Pharmaceutical Holdings
• Reduced price of drugs to NHS hospitals by 90% but increased price of drugs to GP = maximised its profits
• OFT (Office of Fair Trading) investigated and fined company = saved NHS £2 million per year