4.1.5.6 Monopoly (Paper 1) Flashcards
1
Q
Pure monopoly
A
- Exists when there is a single supplier of a good or service - 100% market share
- Few examples in reality - a theoretical model instead
2
Q
Companies that could be considered monopolies?
A
- Tesco - 30% in groceries market
- Google - 90% in internet traffic
3
Q
Define monopoly power
A
Power of a firm in a market to act as a price maker (set the ruling market price)
4
Q
Characteristics of monopolies
A
- High barriers to entry/exit
- One firm dominating market
- Differentiated products
- Imperfect competition
5
Q
Explain how monopolies make SNP
A
- Firms w/ monopoly power can restrict their output to raise price, which boosts their SNP
- Because of B2E - firms able to maintain these profits - as its unlikely that new firms can enter the market easily to compete the profits away
6
Q
Monopoly - profit max
A
- Profit max is where MC = MR - the profit-max price found by plotting line vertically from the equilibrium quantity to the AR (demand) curve and across to the y-axis
7
Q
Define B2E
A
- Any feature of a market that makes it difficult or impossible for new firms to enter
8
Q
Natural barriers to entry
A
- Climatic, geographical or geological factors - make product difficult to replicate elsewhere
- E.g. - soil and weather around Reims and Épernay in northern France ideal for production of the grape varieties to make champagne - other sparkling wines don’t have the same exclusivity
9
Q
Possible barriers to entry?
A
- Natural B2E
- EoS
- Legal barriers
- Product differentiation
- Sunk costs
10
Q
Economies of scale as a B2E
A
- AC of production fall as output rises
- Large firms can set prices below those of any potential new entrant firms - and still make a SNP
- E.g. - large supermarket such as Tesco able to negotiate a much cheaper price per unit when buying dairy products from farmers in terms of a bulk-buying discount - compared a smaller independent convenience stores
- Acts as deterrent for new firms to enter
11
Q
Legal barriers
A
- Patents, copyrights, trademarks
- Give a single firm or individual right to have a monopoly over a new product, process or intellectual property - either forever or over a given time
- E.g. - British inventor James Dyson holds many patents over his original designs for a range of household appliances - notably vacuum cleaners - cannot legally be copied
12
Q
Production differentiation
A
- Existing firms in market may have spent considerable amounts over many years on advertising and branding to build up a significant consumer loyalty and marketing profile
- E.g. - would be difficult for any new cola manufacturer to take market share from Coca-Cola and PepsiCo - both have spent billions over many years on advertising (including sponsorship of sporting events such as the football World Cup)
13
Q
Sunk costs
A
- Unrecoverable costs - not easily recoverable if a firm in unsuccessful and has to exit - i.e. these financial commitments are essentially lost, or ‘sunk’
- Huge risk element
- May include spending on specialist market research or specialist equipment that couldn’t easily be sold to another firm
- E.g. - an oil company may spend millions on detecting resources of crude oil before it extracts any - the threat of losing money acts as a deterrent to new firms considering entering a market
14
Q
Concentrated market
A
- Dominated by a small number of firms
- Monopolies and oligopolies may be considered concentrated markets
- Calculated by concentration ratio
15
Q
Productive inefficiency
A
- PE occurs when firms produce at minimum ATC - minimum inputs used to produce maximum outputs
- Monopolies don’t have to be competitive to survive - don’t face threat of firms taking market share - so little incentive to cut costs to a minimum
