Competition And Monopoly In Markets

Question 1

Characteristics of competitive market

Answer 1

Slightly differentiated products 
Low barriers to entry and exit
All have access e.g. technology
Weak consumer loyalty
Full information 
Efficient

Question 2

What is a pure monopoly

Answer 2

A single seller in a firm

Question 3

Working monopoly

Answer 3

Any firm with greater than 25% if the industries total sales. In practice, there are many markets where businesses enjoy some degree of monopoly power even if they do not have a 25% market share.

Question 4

Define oligopolistic industry

Answer 4

The existence of a few dominant firms, each has market power and which seeks to protect and improves its position over time

Question 5

Define duopoly

Answer 5

Two firms take the majority of demand

Question 6

How can monopolies develop

Answer 6

Internal growth
Merger
Acquisition

Question 7

Horizontal integration

Answer 7

Where two firms join at the same stage of production in one industry

Question 8

Vertical integration

Answer 8

Where a firm integrates with businesses at different stages of production e.g. By buying it’s suppliers or controlling the main retail outlets

Question 9

Forward vertical integration

Answer 9

Occurs when a business merges with another business further forward in the supply chain

Question 10

Backward vertical integration

Answer 10

When a firm merges with another business at a previous stage of the supply chain

Question 11

What is internal expansion of a business

Answer 11

Economies of scale

Question 12

Types of barriers to entry

Answer 12

Patents
Advertising
Marketing
Brand proliferation

Question 13

What are patents

Answer 13

Legal property rights

Generally valid for 12-20 years

Question 14

Main argument against market power

Answer 14

Monopolists can earn abnormal (supernormal) profits at the expense of efficiency and the welfare of consumers and society

Question 15

Monopoly price

Answer 15

Assumed to be higher than marginal cost leading to a loss of allocative efficiency and a failure of the market. The monopolist is extracting a price from consumers that is above the cost of resources used in making the producing and, consumer’s needs and wants are not being satisfied, as the product is being underconsumed

Question 16

Effect of higher monopoly prices

Answer 16

Regressive effects on lower income households

Question 17

A sense of genuine market competition (monopoly)

Answer 17

Lead to production inefficiencies and X inefficiencies such as wasteful production and advertising spending

Question 18

Why might a government use competition policy

Answer 18

The higher average cost of there are inefficiencies in production means that the firm is not making optimum use of scarce resources

Question 19

Other reasons why a government may intervene with a monopoly market

Answer 19

• higher prices limit output and lead to fewer economies of scale being exploited
• protected markets means that there is less drive to innovate
• monopolistic firms may get too big leading to diseconomies of scale (rising long run average cost)