4.4 Monopoly and Monopoly Power

Question 1

What is a monopoly?

Answer 1

Is the only firm in the industry

Therefore, the firm is the industry

Question 2

In monopolistic competition, what is the relationship between the firms market demand and the market demand?

Answer 2

They are the same

Firm demand curve = Market demand curve

Question 3

In monopolistic competition, are the barriers to entry/exit high or low?

Answer 3

High

Question 4

In terms of price, profit and allocation or resources, what happens in monopolistic competition? (4)

Answer 4

Super high prices
Supernormal profits
Allocative inefficiency
Misallocation of resources

Question 5

What are the 3 types of monopoly?

Answer 5

Natural
Geographical
Government created

Question 6

What is a natural monopoly? (2)

Answer 6

A country or firm has complete control over a natural resource
There is only room in a market for one firm - they benefit from full economies of scale

Question 7

What is a geographical monopoly?

Answer 7

Monopoly created based on it being the only producer in that area
For example a small village with one local supermarket

Question 8

What is a government created monopoly?

Answer 8

Markets that the government feel are too important to be left to competition
Governments purposely create a private monopoly

Question 9

What factors influence monopoly power? (4)

Answer 9

Barriers to market entry
Number of competitors
Advertising
Product differentiation

Question 10

What are the types of barriers to entry/exit? (2)

Answer 10

Natural

Artificial

Question 11

How are natural barriers to entry exit formed? (2)

Answer 11

Economies of scale - established large firms are able to produce at a lower long run average cost curve
Indivisibilities - prevent some goods and services from being produced in plants that are below a certain size: oil refining

Question 12

How are artificial barriers to entry exit formed? (2)

Answer 12

Deliberate actions by firms already in the market to prevent new entrants
Patents, limit pricing and predatory pricing

Question 13

What is informative advertising?

Answer 13

Increases competition by providing useful information about goods and services which are available to buy

Question 14

What is persuasive advertising?

Answer 14

Often reduces competition
Customers become captive
Little information
Makes people believe the good is a must have

Question 15

What is saturated advertising?

Answer 15

Goes hand in hand with persuasive advertising. Large firms will use saturation advertising to prevent small firms from entering the market

Question 16

What is product differentiation?

Answer 16

Making a different product

Question 17

How and why might firms do product differentiation?

Answer 17

• From other products through design, methods of producing, or its functionality
• When this is paired with persuasive advertising and other elements of marketing strategies, this can increase monopoly power
• Consumers know they are getting a slightly different product and it may fit their needs better

Question 18

What is the concentration ratio?

Answer 18

Ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output

Question 19

How are concentration ratios written?

Answer 19

number of firms : percentage of market

For example 3:75 means that 3 firms have 75% market share

Question 20

What are the arguments against monopolies? (4)

Answer 20

Market failure and resource misallocation
Producer sovereignty
Productively efficient
Collusion

Question 21

Why is Market failure and resource misallocation an argument against monopolies? (4)

Answer 21

• Monopolies can increase its profit by reducing market output, compared to the output that would be produced in a competitive market
• Market failure and resource misallocation occur because output falls and prices rise
• Higher prices mean consumers buy less of the good than they would have
• Resource misallocation: too little of the good is produced and consumed at too high a price

Question 22

Why is Producer sovereignty an argument against monopolies? (4)

Answer 22

• This exploits consumers by raising prices
• The impact is greatest when the product is inelastic
• Persuasive advertising, brand imaging and other marketing strategies aim to reduce elasticity of demand and shift the demand curve to the right

Question 23

Why is productive efficiency an argument against monopolies? (4)

Answer 23

• In competitive markets, a new entrant would reduce the price
• This means that to remain profitable, firms must reduce costs of production
• This pressure is less powerful in Monopoly
• They have less incentive to reduce average cost of production and therefore may be less productively efficient

Question 24

Why is collusion an argument against monopolies? (4)

Answer 24

• Sometimes firms competing against each other in concentrated markets will decide to reduce competition and give themselves an easy life
• They do this by making agreements and colluding together
• Can be done by price ring or cartel agreement
• These are illegal and tend to be undercover agreements

Question 25

What is resource misallocation?

Answer 25

When resources are allocated in a way which does not maximise economic welfare

Question 26

What is collusion?

Answer 26

Firms cooperating in order to reduce competition maximise their profits