Abuse of Monopoly Power

Question 1

What is a monopoly?

Answer 1

Monopoly is a market structure in which only one firm produces all the output

Question 2

What is monopoly power?

Answer 2

The ability of a firm to influence the price of the good that it produces and sells. It results in an underallocation of resources to the production of the good in question, and hence is allocatively inefficient and a market failure.

Question 3

What are the 3 examples of abuse of monopoly power?

Answer 3

1. Ability to exploit consumers by using price discrimination (charging excessively high prices)
2. Collusion
3. Predatory pricing to limit competition

Question 4

What are government responses to monopoly power?

Answer 4

1. Legislation
   - prohibiting takeovers and mergers
   - breaking up monopolies
2. Regulation
   - governments regulate natural monopolies to bring about an outcome that is more favorable to consumers (lower prices and higher quantities)
3. Nationalization
   - transfer of ownership of a firm away from the private sector and towards government ownership
   - alternative to regulation of natural monopolies
   - however, public firms tend to be more inefficiently managed than private ones
4. Trade liberlization
   - removal of barriers to trade leads to larger competition, resulting in lower prices