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

1) Firm must have market power
2) Firm must have information about consumers and their willingness to pay (must be identifiable differences)
3) 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 10

Example of price discrimination?

Answer 10

• 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

Question 11

Characteristics of a market where a natural monopoly could emerge?

Examples?

Answer 11

Substantial fixed costs but low marginal costs

Railway industry

Question 12

Natural monopoly diagram?

Answer 12

Almost flat AC curve
MC below AC for all output
AR and MR same as monopoly

Question 13

Types of barriers to entry?

Answer 13

• Strategic - caused by existing firms in industry (e.g. advertising, brand loyalty)
• Structural - natural (e.g. monopoly or high capital entry costs)
• Statutory - legal barriers (e.g. patents)