3.4.5 monopoly Flashcards
What is a pure monopoly?
Assumed to be the only firm in the industry - 100% of the market share.
What is a legal monopoly?
Any firm that holds over 25% of the industries’ total sales
What is a dominant firm?
A firm that holds at least 40% of the market share.
What are the characteristics of a monopoly?
- firms are price makers/have price setting power, due to steep downward sloping demand curve
- high barriers to entry and exit
- firms make abnormal profit in the short-run and long-run
- firms assumed to profit maximise at MR = MC
What type of profit is made by a monopoly when they profit maximise?
Monopoly profit maximises at MR = MC, this creates abnormal profit as AR > AC.
What are some advantages of monopoly power?
- abnormal profit can finance investment enables firms to maintain competitive edge - increased dynamic efficiency
- abnormal profit means firms have reserves so that they can overcome short-term losses and provide funds for R + D
- huge profits made for shareholders
- maximised economies of scale reducing prices for consumers or increasing profits
- monopoly power means firms are able to match prices of global companies
- cross-subsidisation may lead to increased range of goods available for consumers = higher utility
- price discrimination may raise total revenue to allow the survival of a good or service eg. economy class flights are funded by business and first class flights
- workers receive high wages due to inefficiencies within monopolies
What are the disadvantages of monopoly power?
- abnormal profit means there is less incentive for efficiency and innovation
- abnormal profit means firms focus on protecting market dominance
- monopoly power means higher prices and lower output for consumers
- monopolies waste resources through cross-subsidisation, using profits from one sector to finance losses in another sector
- monopolists may undertake price discrimination to raise producer surplus and decrease consumer surplus
- monopolists don’t produce at the most efficient output level (at lowest point of AC curve)
- lack of competition may mean that firms don’t make the maximum profit they could
- they produce at lower outputs so employ less workers
- less choice and poorer quality = reduced utility for consumers
What is efficiency like for monopoly firms?
- not allocatively efficient as P > MC
- not productively efficient as MC doesn’t equal to AC
- likely to be dynamically efficient due to high investment through abnormal profits
What is a natural monopoly?
- occurs when a large business can supply a market at lower price than smaller businesses
- a situation where there can’t be more than one efficient provider of a good, competition may increase costs and prices
- LRAC falls continuously as output increases
- sunk costs are extremely high
What are some examples of natural monopolies?
water supply and railway tracks - these industries have such large economies of scale that new entrants would be unable to match costs and prices of established firms. there may be no good substitutes for these goods eg. water companies
What are the returns to scale like for a natural monopoly?
- increasing returns to scale at all levels of output
- LRAC will fall as production expands further
- long run MC is below LRAC
- may only be room for one supplier to fully exploit economies of scale, reach the minimum efficient scale and achieve productive efficiency
What is third degree price discrimination?
This is when monopolists charge different prices to different people for the same g/s eg. peak and off-peak train tickets.
What are the necessary conditions for price discrimination?
- the firm must be able to clearly separate the market into groups of buyers
- customers must have different elasticities of demand
- must be able to control supply
- must be able to prevent buyers in the more expensive market buying from the cheaper market
- limit ability of consumers to resell
What are the costs and benefits of price discrimination?
- firms are able to increase profits, this can be invested in research and development, improving dynamic efficiency
- those in the elastic market pay a lower price than others and benefit from cross subsidisation. May lead to increased equality
- consumers lose some consumer surplus as some have to pay a higher price.
