4.1.5.6 Monopoly and monopoly power Flashcards
What defines a pure monopoly?
A single seller in a market with:
- High barriers to entry
- Price making power
- Ability to earn long-run supernormal profits
When is a firm considered to have monopoly power in the UK?
When it controls >25% market share (e.g., Google with 90% search engine share).
What factors influence monopoly power?
- Barriers to entry
- Number of competitors
- Advertising expenditure
- Product differentiation
What are key barriers to entry that maintain monopoly power?
- Economies of scale
- Limit pricing
- Resource ownership
- Sunk costs
- Brand loyalty
- High setup costs
How does a monopoly maximize profits?
Produces where MC = MR (Q1) and charges price P1 from demand curve → earns supernormal profits (shaded rectangle).
Why is a monopoly allocatively inefficient?
P > MC at profit-maximizing output → under-consumption of the good (market failure).
What are advantages of monopoly?
- Supernormal profits fund R&D (dynamic efficiency)
- Economies of scale → lower costs
- Natural monopoly avoids duplicate infrastructure
- Export revenue potential
What are disadvantages of monopoly?
- Higher prices → consumer exploitation
- Allocative inefficiency (P>MC)
- Productive inefficiency (not at min AC)
- Limited consumer choice
- Lack of innovation incentives
How do economies of scale act as a barrier?
Incumbent’s cost advantage deters new entrants who can’t match low prices.
What is limit pricing?
Setting prices below potential entrants’ costs to prevent market entry.
Why are monopolies price makers?
As sole suppliers, they face the industry demand curve and set prices to maximize profits.
How does advertising strengthen monopoly power?
Increases brand loyalty → makes demand more price inelastic → harder for competitors to gain share.
What is a natural monopoly?
Industry where one firm can supply entire market at lower cost than multiple firms (e.g., utilities).
Why might governments allow monopolies?
For:
- Natural monopolies (efficiency)
- Innovation incentives
- Export potential
- Tax revenue
How does product differentiation affect monopoly power?
More differentiation → fewer direct competitors → greater pricing power.
What is the key difference between monopoly and perfect competition diagrams?
Monopoly:
- Downward sloping demand (vs horizontal in PC)
- MR below demand curve
- Can show supernormal profits in long run
Why might monopolies be dynamically efficient?
Supernormal profits allow investment in innovation (e.g., pharmaceutical patents).
How do sunk costs deter entry?
Unrecoverable costs (e.g., advertising) make entry risky if failure is likely.
What is the social cost of monopoly?
Deadweight welfare loss from reduced output (Qpc to Qm) and higher prices.
How can monopolies price discriminate?
Charge different prices to different consumer groups to increase profits (e.g., peak/off-peak pricing).
Why are monopolies productively inefficient?
No competitive pressure → operate above minimum AC (X-inefficiency).
What real-world examples show monopoly power?
- Google (search)
- Microsoft (OS)
- Local utilities
- Patented drugs
How might governments regulate monopolies?
Through:
- Price caps
- Windfall taxes
- Breaking up firms
- Promoting competition
Why do monopolies earn supernormal profits long-term?
Barriers prevent competitor entry → no profit erosion unlike perfect competition.
