9.2 Monopoly Flashcards
What are the 5 Monopoly Characteristics?
The 5 Monopoly Characteristics are: 1) There is one dominant firm in the market. 2) The goods and services produced are differentiated. 3) There are high barriers to entry and exit for firms. 4) There is imperfect information/knowledge of market conditions for both consumers and producers. 5) Firms are profit maximisers producing where marginal cost = marginal revenue at all times.
What is a pure monopoly?
A pure monopoly is a market structure where there is only one dominant firm that controls the entire market, resulting in 100% market share.
What is legal monopoly power?
Legal monopoly power is when one firm has at least 25% market share, giving it significant control over the market.
What is the implication of goods and services being differentiated in a monopoly market?
The implication is that the monopolist can set prices since it faces a downward sloping price inelastic demand curve. However, it is governed by the demand curve and can only set one of price or quantity.
What are the barriers to entry and exit in a monopoly market?
There are high barriers to entry and exit for firms, which make it difficult and potentially expensive to enter or exit the market. Firms may be attracted by supernormal profits made by the monopolist, but they may be unable to enter due to the high barriers to entry.
What is the impact of imperfect information in a monopoly market?
There is imperfect information/knowledge of market conditions for both consumers and producers. Consumers do not have perfect information regarding prices charged, and producers do not have perfect information over costs, technology, and prices in the industry.
How do firms behave in a monopoly market?
Firms are profit maximisers and produce where marginal cost equals marginal revenue at all times.
Monpoly - Firm Behaviour
Diagram
A profit maximising monopoly will produce where MC=MR, at Qm with a price at Pm. At this level of production AR>AC therefore supernormal profits are being made indicated by the shaded area. These profits can be sustained in the long run due to the high barriers TO entry preventing new firms entering the market and thus this is the long run equilibrium position for a profit maximising monopoly.
Why do monopolies produce outcomes that are allocatively inefficient?
Monopoly Performance Cons + Draw Diagram
Monopolies charge prices greater than marginal cost at the profit maximising level of output, which results in a misallocation of resources as resources are not allocated according to consumer demand. Consumers get a lower quantity than they desire, and prices are high, reducing consumer surplus in the market. The quality of the product being sold may also suffer due to the lack of competitive forces. Monopolists can get away with allocative inefficiency given the lack of competition in the market where consumers are unable to switch their consumption to rival firms.
How do monopolies compare to competitive markets in terms of allocative efficiency?
Monopoly Performance Cons
In comparison to competitive markets, monopolies charge excessively high prices and low quantities, resulting in a deadweight loss of both consumer and producer surplus. Monopolists charge higher prices than the competitive price taken at allocative efficiency where demand meets supply. Quantity in the market is below the social optimum, indicating a misallocation of resources, allocative inefficiency, and a welfare loss to society.
Why are monopolies productively inefficient?
Monopoly Performance Cons
Monopolies do not produce at the minimum point on the average cost curve, choosing instead to voluntarily forgo some economies of scale. Output could be increased further with lower average costs, but as this does not correspond with profit maximisation, where MR=MC, productive inefficiency prevails. Monopolists can get away with productive inefficiency given the lack of competition in the market where rival firms who are productively efficient charging lower prices do not exist.
How can monopolies be X inefficient?
Monopoly Performance Cons
Monopolies can become complacent and lazy in their production process, allowing waste (cost in excess of average cost) to creep in at quantity Qm. As a consequence, consumers suffer from higher prices and lower consumer surplus than if all waste, excess cost, was eradicated. Monopolists can get away with X inefficiency given the lack of competition where rival firms who are X efficient charging lower prices do not exist.
How can monopolies be productively inefficient if they become too large?
Monopoly Performance Cons
Monopolies can be productively inefficient if they become too large and suffer from diseconomies of scale. This occurs when output takes place where average costs are rising, occurring due to problems with communication, coordination, and/or motivation, where productivity is reduced due to the excessive size of the firm. As a consequence, consumers suffer from higher prices and lower consumer surplus than if the monopolist was smaller and benefiting from lower average costs.
How can monopolies be dynamically efficient?
Monopoly Performance Pros
Monopolists can be dynamically efficient as supernormal profit is being made in the long run. Such profit can be reinvested back into the company in the form of technology advances, innovative new products and R&D. This is hugely beneficial for consumers who will receive brand new, better quality products over time. Prices could be lower over time if technology advances reduce costs for businesses, which are then passed on to consumers. The choice available to consumers would also increase. For the monopolist, new product development can maintain monopoly power, especially if such products are patentable and better technology can reduce costs of production, increasing the profit-making potential of the firm even more over time.
How can monopolies cross-subsidise loss-making goods or services?
Monopoly Performance Pros
Supernormal profit being generated from a successful product can be used to subsidise losses of another product, thus increasing social welfare where otherwise the loss-making product would have ceased in the market.
How can monopolies be more productively efficient than smaller competitive firms?
Monopoly Performance Pros + Draw Diagram
- Even though monopolists are productively inefficient, they may still be exploiting greater economies of scale than smaller competitive firms who produce lower levels of output given the ferocity of the competition. The costs of production can be lower for monopolists at MCm, compared to competitive firms at MCc, given their greater economies of scale exploitation resulting in lower prices charged and higher quantities produced than competitive firms.
- The diagram shows a comparison between a monopoly and a perfectly competitive market. The monopolist produces at quantity Qm and price Pm, while the competitive firm produces at quantity Qc and price Pc. The monopolist is shown to have a lower average cost at MCm compared to the competitive firm at MCc. This is because the monopolist is exploiting greater economies of scale, allowing them to produce at a lower average cost than the competitive firm. As a result, the monopolist is able to charge a lower price and produce a higher quantity than the competitive firm, even though they are productively inefficient.
