5.4 Monopoly And Monopoly Power Flashcards
What is a monopoly?
Only one firm in the market
What is a working monopoly?
25% of market ownership
What is a pure monopoly?
Single supplier that dominates the whole market 100% concentration
Characteristics of a monopoly?
-power to set prices
-supernormal profit
-barriers to entry and exit
What stops a market getting more than 25% of the market in the UK?
Competition market authority
Why can a monopoly keep abnormal profits in the long run and short run?
Due to the artificial and natural barriers to exit and entry
What is a dominant firm?
At least 40% of market
How do firms exercise their monopoly power?
Keeping firms out of the market
What is needed for a duopoly?
2 firms more than 80% of market
What is needed for an oligopoly?
5 firm concentration is greater than 60%
What are artificial barriers?
-result of deliberate action by incumbent firms from entering the market
What are the artificial barriers?
-patents
-product differentiation
-high levels of expenditure on advertising and marketing
-benefiting from ‘first move’ advantage
-limit pricing and predatory pricing
What is monopoly power?
Ability of a monopoly to raise and maintain a price level that would prevail under perfect competition
(Market power can also be exercised usually to a lesser degree by firms in oligopoly and monopolistic competition)
What are sunk costs?
Costs that have already been incurred and cannot be removed
What are natural barriers?
Barriers to market entry caused by geography
E.g one firm has control of an essential resource for a certain industry (other firms are unable to compete in the industry)
Artificial barriers: product differentiation?
By differentiating products they become protected by intellectual and legislation
Prevents copy cat products
Artificial barriers: benefiting from the ‘first mover’ advantage?
Being first into a market allows a firm to establish themselves build a customer base and make it difficult for later rivals to compete
Artificial barriers: limiting pricing?
Firm already in the market reduces prices so they only make a normal profit to limit the entry of new competitors
Artificial barriers: predatory pricing?
When an established firm deliberately sets prices below costs to force new market entrants out of business
Artificial barriers:patents?
Provide legal protection for invention for all variants of the product that they develop
What provides a natural barrier to entry for firms?
-economies of scale, lower long run average costs means that new entrants are on high short run average costs curves.
What stops monopoly’s going over 25% of market share
Competition market authority (CMA)
Why can a monopoly keep supernormal profits in the long run?
Because of the entry barriers
What is price discrimination?
charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to.
In a monopoly can firms set the quantity and price?
No only one of the two
Diagram for profit maximisation of a monopoly
Describe this diagram?
Market equilibrium at point A (where MC=MR)
P1 maximum price a monopolist can charge and succeed in selling output Q1(point B on the AR CURVE REALLY IMPORTANT TO REMEMBER THIS
