7) Monopoly Flashcards
define monopoly
a form of market structure in which there is only one seller of a good or service
what is perfect/first degree price discrimination?
a situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
what is arbitrage?
a process by which prices in two market segments will be equalised as a result of purchase and resale by market participants
what is dynamic efficiency?
lowering the position of the AC curve over time by improving production processes
what is X inefficiency?
actual average cost is above the AC curve due to lack of competitive pressure
what is second degree price discrimination?
lower prices are charged when larger quantities are bought
what is third-degree price discrimination?
a firm charges different prices for the same product to different market segments, eg student discount
what are the assumptions of a monopoly model: what are their objectives?
The firm aims to maximise profits
what are the assumptions of a monopoly model: how many sellers?
There is a single seller of a good,
There is no competition
what are the assumptions of a monopoly model: are they a price maker/price taker?
There is no competition, So the firm is a price maker because this gives it market power
what are the assumptions of a monopoly model: are there substitutes?
There are no substitutes for the good
• The product is ‘heterogeneous’
what are the assumptions of a monopoly model: are there substitutes? what does this mean?
Advertising and strong branding build brand loyalty
• So the firm is a price maker because this gives it market power
what are the assumptions of a monopoly model: are there barriers to entry?
Has barriers to entry
what are the assumptions of a monopoly model: are there barriers to entry? what does this mean?
• Insulates firm from competition in the long run
• So the firm is a price maker in the long run because this gives it market power in the long run
what are the assumptions of a monopoly model: is there perfect or imperfect knowledge?
There is imperfections knowledge
why is there imperfections knowledge?
- Monopolist may have patents or unique knowledge leading to more advanced production techniques
• So the firm is a price maker because this gives it market power
analysis of monopoly diagram: show a monopoly profit maximises
As seen in the preceding diagram, the monopoly profit maximises, so produces at MC=MR, leading to Q0 production at a unit cost of ACO and a price of PO. PO-ACO is the supernormal profit per unit, so the shaded rectangle Q0x(PO-ACO) is the total SNP.
is there always SNP?
Because barriers to entry are very high, new firms are unable to enter the market, so the SNP is made by the firm is not competed away in the short or the long run.
Therefore, this one diagram shows both the short run and the long run equilibrium for a monopolist.
analysis: is a monopoly productively efficient?
Because production is not at the bottom of the AC curve, the monopoly is not productively efficient. Furthermore, because production is not at P=MC the monopoly is not allocatively efficient.
what are the 2 advantages of a monopoly?
1) could be dynamically efficient
2) benefits from economies of scale
advantages of a monopoly: dynamically efficient
Higher profit levels than a more competitive firm means more scope to invest SNP into R&D. It may choose to develop advanced technology or train workers if it knows this will keep barriers to entry high.
advantages of a monopoly: benefits from economies of scale vs competitive market
Being the sole supplier means scope for benefiting from economies of scale and achieving a lower average cost than a competitive firm could. Even with a high profit per unit, the price charged could be lower than in a more competitive market. Especially the case if a natural monopoly and fixed costs are so high economies of scale are never fully exploited.
what are the 3 disadvantages of a monopoly?
1) economically inefficient
2) could be x- inefficient
3) could be dynamically inefficient/lack of consumer choice
disadvantages of monopoly: economically inefficient
Productive and allocative inefficiency mean that quantity supplied to consumers is restricted, reducing utility, and at a higher price, further reducing consumer utility - an inefficient use of scarce resources
disadvantages of monopoly: could be x-inefficient
Lack of competition reduces incentive to reduce excessive stock levels or overstaffing, leading to higher prices for consumers and lower utility
disadvantages of monopoly: dynamically inefficient/lack of consumer choice
• Lack of competition may mean that it does not reinvest profits to improve the quality of its products and, even though they are unhappy with the quality, consumers have to buy them anyway as there are no substitutes available
judgement: why could a monopoly be better than a more competitive market? (2 things)
1) depends on objectives
2) forced to be dynamically efficient
judgement: why could a monopoly be better than a more competitive market: objectives
a state owned monopoly might seek allocative efficiency and be mandated to consider social costs and benefits
judgement: why could a monopoly be better than a more competitive market: dynamically efficient
If a monopoly is threatened with competition it can be forced to be dynamically efficient and still benefit from economies of scale, which a firm in a more competitive market is less able to do
judgement: why could a monopoly be worse than a more competitive market?: competition
If, due to lack of competition (actual or threatened), a monopoly is complacent, it will suffer from x-inefficiency, innovate little, and be forced to charge high prices.
Consumers, therefore, will have the downsides of reduced choice and higher prices without the benefits of a higher quality product
