7) Monopoly

Question 1

define monopoly

Answer 1

a form of market structure in which there is only one seller of a good or service

Question 2

what is perfect/first degree price discrimination?

Answer 2

a situation arising in a market whereby a monopoly firm is able to charge each consumer a different price

Question 3

what is arbitrage?

Answer 3

a process by which prices in two market segments will be equalised as a result of purchase and resale by market participants

Question 4

what is dynamic efficiency?

Answer 4

lowering the position of the AC curve over time by improving production processes

Question 5

what is X inefficiency?

Answer 5

actual average cost is above the AC curve due to lack of competitive pressure

Question 6

what is second degree price discrimination?

Answer 6

lower prices are charged when larger quantities are bought

Question 7

what is third-degree price discrimination?

Answer 7

a firm charges different prices for the same product to different market segments, eg student discount

Question 8

what are the assumptions of a monopoly model: what are their objectives?

Answer 8

The firm aims to maximise profits

Question 9

what are the assumptions of a monopoly model: how many sellers?

Answer 9

There is a single seller of a good,
There is no competition

Question 10

what are the assumptions of a monopoly model: are they a price maker/price taker?

Answer 10

There is no competition, So the firm is a price maker because this gives it market power

Question 11

what are the assumptions of a monopoly model: are there substitutes?

Answer 11

There are no substitutes for the good

• The product is ‘heterogeneous’

Question 12

what are the assumptions of a monopoly model: are there substitutes? what does this mean?

Answer 12

Advertising and strong branding build brand loyalty
• So the firm is a price maker because this gives it market power

Question 13

what are the assumptions of a monopoly model: are there barriers to entry?

Answer 13

Has barriers to entry

Question 14

what are the assumptions of a monopoly model: are there barriers to entry? what does this mean?

Answer 14

• 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

Question 15

what are the assumptions of a monopoly model: is there perfect or imperfect knowledge?

Answer 15

There is imperfections knowledge

Question 16

why is there imperfections knowledge?

Answer 16

• 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

Question 17

analysis of monopoly diagram: show a monopoly profit maximises

Answer 17

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.

Question 18

is there always SNP?

Answer 18

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.

Question 19

analysis: is a monopoly productively efficient?

Answer 19

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.

Question 20

what are the 2 advantages of a monopoly?

Answer 20

1) could be dynamically efficient
2) benefits from economies of scale

Question 21

advantages of a monopoly: dynamically efficient

Answer 21

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.

Question 22

advantages of a monopoly: benefits from economies of scale vs competitive market

Answer 22

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.

Question 23

what are the 3 disadvantages of a monopoly?

Answer 23

1) economically inefficient
2) could be x- inefficient
3) could be dynamically inefficient/lack of consumer choice

Question 24

disadvantages of monopoly: economically inefficient

Answer 24

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

Question 25

disadvantages of monopoly: could be x-inefficient

Answer 25

Lack of competition reduces incentive to reduce excessive stock levels or overstaffing, leading to higher prices for consumers and lower utility

Question 26

disadvantages of monopoly: dynamically inefficient/lack of consumer choice

Answer 26

• 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

Question 27

judgement: why could a monopoly be better than a more competitive market? (2 things)

Answer 27

1) depends on objectives
2) forced to be dynamically efficient

Question 28

judgement: why could a monopoly be better than a more competitive market: objectives

Answer 28

a state owned monopoly might seek allocative efficiency and be mandated to consider social costs and benefits

Question 29

judgement: why could a monopoly be better than a more competitive market: dynamically efficient

Answer 29

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

Question 30

judgement: why could a monopoly be worse than a more competitive market?: competition

Answer 30

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