3.4.5 Monopoly

Question 1

Monopoly

Answer 1

One seller dominates the industry.

Question 2

Pure monopoly

Answer 2

A pure monopoly exists when one firm has 100% market share e.g. the closest to a pure monopoly is Google with 88% of market share.

Question 3

Legal monopoly

Answer 3

A legal monopoly is one that has more than 25% of market share e.g. Tesco is a legal monopoly as it has 28% of the market.

Question 4

Characteristic of monopoly: price setting power

Answer 4

A monopoly has the power to set the price of its product, and it faces a downward-sloping demand curve. It can choose the price and quantity of output to maximize its profits..

Question 5

Characteristic of monopoly: high barriers to entry and exit

Answer 5

Monopolies often maintain their dominant position due to high barriers to entry, which can include factors like patents, economies of scale, control over essential resources, and government regulations.

Question 6

Characteristic of monopoly: unique product

Answer 6

The monopolist typically offers a unique product that has no perfect substitutes. This lack of substitutes gives the monopolist significant control over pricing.

Question 7

Price discrimination

Answer 7

Charging different prices to different groups of consumers for the same good or service.

Question 8

Third-degree price discrimination

Answer 8

Selling the same product to different groups of consumers based on their willingness to pay.

Question 9

Necessary conditions for third-degree discrimination: price making ability

Answer 9

The firm must have the price making power to charge different prices to each segment.

Question 10

Necessary conditions for third-degree discrimination: market segmentation

Answer 10

The firm must be able to identify different groups of consumers with different price elasticities of demand.

Question 11

Necessary conditions for third-degree discrimination: no arbitrage

Answer 11

The firm must be able to prevent secondary markets where re-sale (arbitrage) can take place at intermediate prices.

Question 12

Examples of third-degree price discrimination

Answer 12

Airline prices: Higher prices when flights are booked at last minute.
Train tickets: Higher prices for peak times and lower prices for off-peak times.

Question 13

Natural monopoly

Answer 13

When LRAC falls continuously over a large range of output so only one firm can exploit economies of scale.