Chapter 14: Market structure: monopoly Flashcards
Define monopoly
A form of market structure in which there is only one seller of a good or service
Define price maker
A firm that is able to choose the selling price for its good or service, as it faces a downward-sloping demand curve
Define dynamic efficiency
A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long-run
Define natural monopoly
A monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable
Define nationalization
Where a privately owned firm or industry is taken into public ownership
Define privatization
Where an enterprise in public ownership us returned to private ownership
Define regulatory capture
A situation in which the regulator of an industry comes to represent the industry’s interest rather than regulating it
Define first-degree price discrimination
Situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
Define third-degree price discrimination
Situation in which a firm is able to charge groups of consumers a different price for the same product
Define arbitrage
A process by which prices in two market segments will be equalised by a process of purchase and resale by market participants
Name 4 characteristics of a monopoly
- One firm only in the industry
- High barriers to entry
- Profit maximisation in SR and LR
- No substitutes
Name 3 sources of monopoly power
- Barriers to entry
- Uniqueness of product
- Lack of near competitors
Name 7 barriers to entry
- Legislation
- Limit pricing
- Control over outlets
- Natural cost advantage
- High sunk costs
- Brand loyalty
- Economies of scale
Draw a monopoly diagram
Diagram sheet
Name 4 interpretations of a natural monopoly
- Occurs when one large business can supply the entire market at a lower price than two or more smaller ones
- Natural monopoly when there can’t be more than one efficient provider of a good. Hence, competition might increase costs and prices
- Industry where MES is a large share of market demand such that there’s only room for one firm to fully exploit all available EOS
- Industry where LRAC curve falls continuously as output expands
Name 6 examples of natural monopolies
- Severn trent
- Transport for London
- National grid
- Royal mail
- BT
- Camelot
Draw a natural monopoly diagram
Diagram sheet
Name 3 reasons why a natural monopoly raises difficult decisions for competition policy
- It’s more productively and allocatively efficient for there to be only one provider in a natural monopoly
- Abnormal profits tend to be made but are required to be reinvested to maintain and improve networks
- Due to the barriers to entry firms may be tempted to exploit their market power and increase prices which would damage consumer welfare
Name 4 options for competition policy
- Nationalisation
- Price controls by regulators
- Introduce competition
- Fines for anticompetitive behaviour
Explain why monopolies are not allocatively efficient
- prices are higher than in competitive markets
- Leads to a loss of allocative efficiency because price is greater - the firm is turning consumer surplus into producer surplus
- Regressive on lower income households
Why is it not productively efficient
Due to the absence of genuine market competition
Is a monopoly x-efficient
No
What may higher prices limit
Final market output meaning that fewer economies of scale will be achieved
What may protective market mean?
There’s less incentive for research and development
Why may monopolies abuse their dominant market position?
To stifle competition
How may monopolies stifle competition?
Limit pricing
If monopolies get too big what may it lead to?
Diseconomies of scale
What does price discrimination give a supplier greater control over? (4)
- Profit maximisation
- More revenue
- Want to fill spare capacity
- Improves cash flow
What 3 conditions must be met for price discrimination
- The firm must have some market power
- Ability to segment customers with differences in price elasticity of demand
- Barriers to prevent consumers from switching suppliers
Name 4 methods of price discrimination
- Time
- Branding
- Geography
- Customer type
Name 3 advantages of price discrimination
- Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss
- If they make abnormal profits they can reinvest into R and D which will help everyone
- Some consumers will benefit from lower prices
Name 5 disadvantages of price discrimination
- Some customers will end up paying high prices and these prices are likely to be allocatively inefficient
- Decline in consumer surplus
- Those who pay higher prices may not be the richest
- There may be administrative costs in separating the markets
- Profits from price discrimination may be used to finance limit or predatory pricing
Name 10 examples of price discrimination
- Time of purchase
- Airline travel and time of departure
- Quantity purchased
- Coupons
- Age discounts
- Mans tested student fees
- Resident parking charges
- Dutch auction for car registration plates
- Loyalty cards
- choosing your seat early
