5.4 Monopoly And Monopoly Power

Question 1

What is a monopoly?

Answer 1

Only one firm in the market

Question 2

What is a working monopoly?

Answer 2

25% of market ownership

Question 3

What is a pure monopoly?

Answer 3

Single supplier that dominates the whole market 100% concentration

Question 4

Characteristics of a monopoly?

Answer 4

-power to set prices
-supernormal profit
-barriers to entry and exit

Question 5

What stops a market getting more than 25% of the market in the UK?

Answer 5

Competition market authority

Question 6

Why can a monopoly keep abnormal profits in the long run and short run?

Answer 6

Due to the artificial and natural barriers to exit and entry

Question 7

What is a dominant firm?

Answer 7

At least 40% of market

Question 8

How do firms exercise their monopoly power?

Answer 8

Keeping firms out of the market

Question 9

What is needed for a duopoly?

Answer 9

2 firms more than 80% of market

Question 10

What is needed for an oligopoly?

Answer 10

5 firm concentration is greater than 60%

Question 11

What are artificial barriers?

Answer 11

-result of deliberate action by incumbent firms from entering the market

Question 12

What are the artificial barriers?

Answer 12

-patents
-product differentiation
-high levels of expenditure on advertising and marketing
-benefiting from ‘first move’ advantage
-limit pricing and predatory pricing

Question 13

What is monopoly power?

Answer 13

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)

Question 14

What are sunk costs?

Answer 14

Costs that have already been incurred and cannot be removed

Question 15

What are natural barriers?

Answer 15

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)

Question 16

Artificial barriers: product differentiation?

Answer 16

By differentiating products they become protected by intellectual and legislation

Prevents copy cat products

Question 17

Artificial barriers: benefiting from the ‘first mover’ advantage?

Answer 17

Being first into a market allows a firm to establish themselves build a customer base and make it difficult for later rivals to compete

Question 18

Artificial barriers: limiting pricing?

Answer 18

Firm already in the market reduces prices so they only make a normal profit to limit the entry of new competitors

Question 19

Artificial barriers: predatory pricing?

Answer 19

When an established firm deliberately sets prices below costs to force new market entrants out of business

Question 20

Artificial barriers:patents?

Answer 20

Provide legal protection for invention for all variants of the product that they develop

Question 21

What provides a natural barrier to entry for firms?

Answer 21

-economies of scale, lower long run average costs means that new entrants are on high short run average costs curves.

Question 22

What stops monopoly’s going over 25% of market share

Answer 22

Competition market authority (CMA)

Question 23

Why can a monopoly keep supernormal profits in the long run?

Answer 23

Because of the entry barriers

Question 24

What is price discrimination?

Answer 24

charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to.

Question 25

In a monopoly can firms set the quantity and price?

Answer 25

No only one of the two

Question 26

Diagram for profit maximisation of a monopoly

Answer 26

Question 27

Describe this diagram?

Answer 27

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