3.5: Monopolies Flashcards
1
Q
What is a pure monopoly?
A
- Where one firm is the sole seller of a product in a market
- No real life examples, but the closest would be Google who have 88% to 90% of the market share
2
Q
What is monopoly power?
A
- Refers to the ability of a firm to control the supply of a particular good or service
- Occurs when a firm has more than 25% of a market’s share
3
Q
Characteristics of Monopolies (Monopoly competition)
A
- Supernormal Profits
- Productively and Allocative Inefficient
- Dynamic Efficient as SNP can be used for R&D
- High barriers to entry
- Third degree price discrimination
4
Q
What is Third Degree price Discrimination?
A
- Occurs when monopolists charge different prices to different people for the same good or service
- eg off-peak and peak times on trains, different prices for child and adult tickets
5
Q
How are firms able to price discriminate?
A
- They must be able to clearly separate the market within the buyers due to the fact that customers have different elasticities of demand.
- eg commuters to LDN for work have inelastic demand as they have little choice other than to pay for the increased price
- They must be able to control supply and prevent buyers from the expensive market from buying in the cheaper market
6
Q
Advantages of a Monopoly
A
- Economies of Scale (natural monopoly): a monopoly can increase output to Q1 and benefit from lower LRAC. In industries with high fixed costs, it can be more efficient to have a monopoly than several small firms
- Higher Innovation: Due to high levels of supernormal profits, this can become a retained profit for R&D, leading to better innovation and better quality of products
7
Q
Disadvantages of a Monopoly
A
- Higher prices: Higher prices for consumers and lower output can lead to a decline in consumer surplus and a dead weight welfare loss
- Allocative inefficiency: P> MC, in a competitive market, the price would be lower and more consumers would benefit
- Productive inefficient: as a monopoly doesn’t operate on the lower point on the AC curve
- X- Inefficiency: A monopoly may have less incentive to cut costs because it doesn’t face competition from other firms
8
Q
What is natural monopoly?
A
A natural monopoly occurs when a single firm can supply a good or service to an entire market at a lower cost than any combination of multiple firms due to economies of scale.
9
Q
Characteristics of a Monopoly
A
- COmpetition is not encouraged as it would raise average costs for the industry
- In industries that have very high fixed costs, such as railways
- These firms are productive and Allocative inefficient
10
Q
Costs and Benefits to Firms
A
- Huge profits through profit max
- High investment, innovation and R&D
- They have the ability to compete with large overseas firms
- Can maximise economies of scale
- EV: firms may not choose to profit maximise due to X-ineffiencies, revenue, sales maximisation, profit satisfying or contestability leading to limit pricing
- EV2: In the long run, the lack of competition may mean that firms become complacent with quality or they might make maximum profit
11
Q
Costs and Benefits to Employees
A
- Fewer workers due to lower outputs
- EV: the Inefficiency of the monopoly may cause employees to receive higher wages especially directors and senior managers.
- Profit satisfying or sales/ revenue maximising may mean output is higher and so more employees are employed
12
Q
Costs and Benefits to Suppliers
A
- Reduced profits for suppliers, due to the fact that a monopoly will also have monopsonist power, causing bulk buying and the fact that the monopoly is the main buyer from the supplier.
13
Q
Costs and Benefits to Consumers
A
- When firms experience economies of scale, they will be more efficient and customers will enjoy a higher consumer surplus
- Higher consumer welfare due to an increased range of goods due to cross subsidization
- EV: consumers may pay higher prices and see poorer quality due to a lack of competition
- less choice for consumers since there is only one firm producing the good
