4.1.5.6 Monopoly and monopoly power Flashcards
What is a likely source of a pharmaceutical firms monopoly power?
The granting of a patent to a pharmaceutical company for a newly-developed drug.
What is a (pure) monopoly?
A market containing a single seller and therefore has 100% market share.
What are the three things that may lead to a monopoly?
High barriers to entry preventing competition entering a market and competing away large profits.
Advertising and product differentiation mean a firms can act as a price maker if consumers believe their product is more desirable than others.
Few competitors in the market.
At what point in a diagram is profit maximized?
When marginal revenue = marginal costs.
What are the barriers to entry in a monopoly market?
The barriers to entry in a monopoly market are total so no new firms can enter the market.
How is productive efficiency achieved?
Productive efficiency is when products are produced at the level of output where average costs are lowest so MC = AC.
Are monopolies productively efficient and why or why not?
Monopolies are not productively efficient since on the long run equilibrium position for a monopoly MC does not equal AC.
Why do monopolies not achieve allocation efficiency?
Because they are over rewarded for the products they are providing since the prices charged by monopolies are greater than marginal costs.
What three drawbacks exist with monopolies?
There’s no need for a monopoly to innovate or respond to changing consumer preferences to make profit so they may become complacent.
Consumer choice is restricted since no other company offers alternatives.
Monopsonist power may be used to exploit suppliers.
What kind of industry would lead to a natural monopoly?
Industries with high fixed costs and large economies of scale.
What are two benefits of monopolies?
Monopolists will produce more than any individual firm in perfect competition would meaning they can keep average costs and (prices if they choose) low.
The security a monopolist has as well as its super normal profits means it can take a long term view and invest in developing and improving future products leading to dynamic efficiency.
What is a monopsony?
When a single buyer dominates a market.
