5.6 Monopolies And Monopoly Power Flashcards
1
Q
What are the characteristics of a monopoly?
Acronym-Please Stop Having Pizza Pies
A
- Profit maximisation. A monopolist earns supernormal profits in both the
short run and the long run. - Sole seller in a market (a pure monopoly)
- High barriers to entry
- Price maker
- Price discrimination
2
Q
When does a firm have monopoly power?
EXAMPLE-GOOGLE
A
- In the UK, when one firm dominates the market with more than 25% market share, the firm has monopoly power.
- For example, Google dominates the search engine market, with 90% share.
3
Q
When can monopoly power be gained?
EXAMPLE-ASDA,SAINSBURYS
A
- Monopoly power can be gained when there are several suppliers.
- If two large firms in an oligopoly (several large sellers) have greater than 25% market share, they are said to have monopoly power.
- For example, Sainsbury’s and Asda have more than 25% market share combined, so they are said to have monopoly power.
4
Q
Which types of firms are said to have monopoly power?
A
- Firms operating in oligopolistic and monopolistic markets are price makers
- They have varying degrees of monopoly power
5
Q
What factors influence monopoly power?
Acronym-Biscuit Tins Are Tasty
A
- Barriers to entry: higher the barriers to entry, the easier it is for firms to
maintain monopoly power. - The number of competitors: the fewer the number of firms, the lower the barriers to entry, and the harder it is to gain a large market share.
- Advertising: can increase consumer loyalty, making demand price inelastic, and creating a barrier to entry.
- The degree of product differentiation: the more the product can be differentiated, through quality, pricing and branding, the easier it is to gain market share.
-This is because the more unique the product seems, the fewer competitors the firm faces
6
Q
What are some examples of barriers to entry which can maintain monopoly power?
Acronym-Everyone Likes Owning Scary Book Sets
A
- Economies of scale
- Limit pricing
- Owning a resource
- Sunk costs
- Brand loyalty
- Set up costs
7
Q
What is meant by economies of scale?
A
- As firms grow larger, the average cost of
production falls because of economies of scale. - This means existing large firms have a cost advantage over new entrants to the market, which maintains their monopoly power.
- It deters new firms from entering the market, because they are not able to compete with existing firms.
8
Q
What is meant by limit pricing?
A
- involves the existing firm setting the price of their good below the production costs of new entrants, to make sure new firms cannot enter profitably.
9
Q
What is meant by owning a resource?
EXAMPLE-BT
A
- Early entrants to a market can establish their monopoly power by gaining control of a resource.
- For example, BT owns the network of cables so new firms would find it very difficult to enter the market.
10
Q
What are sunk costs?
A
- If unrecoverable costs, such as advertising, are high in an industry, then new firms will be deterred from entering the market, because if they are unable to compete, they do not get the value of the costs back.
11
Q
What is brand loyalty?
A
- If consumers are very loyal to a brand, which can be increased with advertising, it is difficult for new firms to gain market share.
12
Q
What are set-up costs?
A
- If it is expensive to establish the firm, then new firms will be unlikely to enter the market.
13
Q
Draw a cost and revenue curve diagram to depict a monopoly
Shade in the supernormal profits made
Explain the diagram
What is the profit maximising equilibrium?
A
- A monopolist earns supernormal profits in both the short run and the long run.
- This is at the point MC = MR
- Since the firm is the sole supplier in the market, the firm’s cost and revenue curve is the same as the industry’s cost and revenue curve.
- Firms are price makers in a monopoly.
- P>MC in the diagram, due to profit maximisation which occurs at MC = MR, so there is allocative inefficiency in a monopoly.
- AR > AC, so there are supernormal profits
14
Q
What are the advantages of a monopoly?
A
- Monopolies can earn significant supernormal profits, so they might invest more in research and development-this can yield positive externalities, and make the monopoly more dynamically efficient in the long run
-there could be more invention and innovation as a result - Firms are more likely to innovate if they can protect their ideas-this is more likely to happen in a market where there are high barriers to entry
- High profits could be a source of government revenue through taxation.
- If there is a natural monopoly, it might be more efficient for only one firm to provide the good or service, since having duplicates of the same infrastructure might be wasteful.
-For example, it might be considered inefficient and wasteful to have two lots of water suppliers. - Monopolies could generate export revenue.
-For example, Microsoft generates a lot of export revenue for America. - Since monopolies are large, they can exploit economies of scales whichs lowers their average costs of production (illustrated with the LRAC curve)
15
Q
What are the disadvantages of a monopoly?
A
- The basic model of monopoly suggests that higher prices and profits and inefficiency may result in a misallocation of resources compared to the outcome in a competitive market
- Monopolies could exploit the consumer by charging them higher prices-means the good is under-consumed, so consumer needs and wants are not fully met.
-This loss of allocative efficiency is a form of market failure - Monopolies have no incentive to become more efficient, because they have few or no competitors
so production costs are high. - There is a loss of consumer surplus and a gain of producer surplus.
-If a monopolist raises the market price above the competitive equilibrium level, output will fall from Q1 to Q2.
-This leads to gains in producer surplus. - Consumers do not get as much choice in a monopoly as they do in a competitive
market
