4.4 Monopoly and Monopoly Power Flashcards
What is a monopoly?
Is the only firm in the industry
Therefore, the firm is the industry
In monopolistic competition, what is the relationship between the firms market demand and the market demand?
They are the same
Firm demand curve = Market demand curve
In monopolistic competition, are the barriers to entry/exit high or low?
High
In terms of price, profit and allocation or resources, what happens in monopolistic competition? (4)
Super high prices
Supernormal profits
Allocative inefficiency
Misallocation of resources
What are the 3 types of monopoly?
Natural
Geographical
Government created
What is a natural monopoly? (2)
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
What is a geographical monopoly?
Monopoly created based on it being the only producer in that area
For example a small village with one local supermarket
What is a government created monopoly?
Markets that the government feel are too important to be left to competition
Governments purposely create a private monopoly
What factors influence monopoly power? (4)
Barriers to market entry
Number of competitors
Advertising
Product differentiation
What are the types of barriers to entry/exit? (2)
Natural
Artificial
How are natural barriers to entry exit formed? (2)
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
How are artificial barriers to entry exit formed? (2)
Deliberate actions by firms already in the market to prevent new entrants
Patents, limit pricing and predatory pricing
What is informative advertising?
Increases competition by providing useful information about goods and services which are available to buy
What is persuasive advertising?
Often reduces competition
Customers become captive
Little information
Makes people believe the good is a must have
What is saturated advertising?
Goes hand in hand with persuasive advertising. Large firms will use saturation advertising to prevent small firms from entering the market
What is product differentiation?
Making a different product
How and why might firms do product differentiation?
- 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
What is the concentration ratio?
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
How are concentration ratios written?
number of firms : percentage of market
For example 3:75 means that 3 firms have 75% market share
What are the arguments against monopolies? (4)
Market failure and resource misallocation
Producer sovereignty
Productively efficient
Collusion
Why is Market failure and resource misallocation an argument against monopolies? (4)
- 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
Why is Producer sovereignty an argument against monopolies? (4)
- 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
Why is productive efficiency an argument against monopolies? (4)
- 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
Why is collusion an argument against monopolies? (4)
- 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
What is resource misallocation?
When resources are allocated in a way which does not maximise economic welfare
What is collusion?
Firms cooperating in order to reduce competition maximise their profits
