HL - Theory Of The Firm: Monopoly Flashcards
What are the assumptions of monopoly?
There’s a single or dominant firm in the market. E.g stamps, Google, diamonds.
No close substitutes.
Significant barriers to entry and exit. It means they can make economic profit in the long run.
What are the barriers to entry?
Economies of scale - a new firm would have to spend a lot of money to operate at the scale required to be competitive.
Branding - advertising, brand image etc can be very expensive.
Legal barriers
What are some examples of legal barriers?
Patents - rights given to firms from government, to be the sole provider for a unit of time.
Licences - granted by governments to particular professions/industries (may be required)
Copyright - An author having the sole right to print, publish or sell copyrights
Trade restrictions (tariffs/quotas) - limits the quantity that can be imported into a country.
Public franchise - granted to firm from gov. who wish to produce a product.
Revenue curves in monopoly
AR = D is down sloping because the firm is the price maker and can chose the output produced. But can only control pice or quantity, not both.
Why won’t a monopolist never chose to operate on the inelastic portion on its AR curve?
Because profit maximisation has to be equal to MC = MR and MC is only positive when on the elastic portion.
What is the condition for profit maximisation, and why can there only be a loss in the short run?
MC = MR for profit max. Beyond that point it’s costing you more than the revenues you’re receiving.
In the long run if there was a loss the firm would just shut down.
What’s the condition needed for Average revenue?
MR = 0
Where TR is at its peak
What is natural monopoly?
Economies of scale are so large that a single firm can supply the Market more cheaply than if there were more firms. E.g water, gas, cable tv, postal services.
What can reduce the power of a natural monopoly?
Technological change
Can you achieve allocative efficiency or productive efficiency in monopoly?
No
Why is there a welfare loss in monopoly?
The monopolist is choosing to produce less than the socially optimum level, due to our assumption that they are only incentivised by profit.
Why is it unlikely that a monopolist will be productively efficient?
It would only happen by chance if MR cuts MC where AC is at its minimum, as they could charge more than the minimum cost.
Why might a monopoly be considered desirable?
Has the ability to finance R&D from economic profits for new inventions which may lead to lower costs for consumers.
It may need to innovate to maintain economic profit. E.g Apple
The existence of economies of scale - price under monopoly is cheaper in spite of economic profit. E.g in natural monopoly AR isn’t at AC’s lowest point.
What are the polices to regulate monopoly?
Due to the market power they may exploit consumers.
Collision (group of firms making agreements for a set price e.g OPEC) is legal in the EU and other countries. It’s hard to uncover as its not written down. May need a whistleblower.
Mergers between firms may be investigated and not allowed if they’re not in public interest.
So,e governments are more strict than others.
When might the OFT start investigating?
The office fair trading are more likely to look into firms with more than 40% of the market share.
What are the three types of abusing market power?
Predatory pricing - selling below costs to force rival firm out of business
Charging higher prices for excess profits
Vertical restraints - paying lower prices to supplies e.g supermarkets to farmers
