LS10 - Monopoly Flashcards
Assumptions of monopoly
Single seller of a good
No substitutes for the good
There are high barriers to entry into and exit from the market (patents,sunk costs - no threat of new entrants taking away LR SN profit)
Firm aims to profit maximise, can adopt price discrimination
Legal def = firm has 25% or more of market share
Monopoly in equilibrium
Monopoly profit max diagram
Monopoly making losses diagram
Monopoly and an increase in demand
Costs and benefits of monopolies to firms, consumers, employees, suppliers
SUPPLIERS:
Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally
monopoly often has the power to dictate what price they will pay to suppliers. PRICE MAY NOT BE PROFITABLE IN THE LONG RUN.
+ dynamic efficiency (reinvest supernormal profits = innovative new products with higher quality for consumers, better tech, pot lower prices overtime, producers can patent ideas, gain market share, lower costs overtime, higher wages for employees) EVAL: profit can be given to shareholders through higher dividends, repay debts, pay workers higher salaries
+ exploit greater economies of scale due to size eg. Car manufacturing (despite not being productivity efficient, can still have lower P & higher Q than comp market) EVAL depends on size of firm, can be DofS
+ regulated natural monopoly (desirable outcome with less waste & inefficiency in certain markets)
+ cross subsidisation (supernormal profits subsidise loss making good/service that is socially desirable)
- allocative inefficiency (consumers exploited = lower consumer surplus, restrict output & choice, quality issues) = consumer deadweight loss in diagram EVAL what if objective isn’t profit max, may want to be better for society, principal-agent problem
- productive inefficiency (forgo economies of scale, dont minimise costs due to lack of comp) EVAL legal monopoly - only 25% so can still be lots of comp eg. Tesco in supermarket market, prevent inefficiencies, if market is Contestable = threat of comp
- X inefficiency (waste in production process due to lack of comp, produce beyond AC curve) EVAL regulation can reduce inefficiencies
- inequalities in necessity markets (low incomes suffer most eg. food/drink third degree price discrimination (EVAL - type of good/service, if more luxury good, less effect, dont mind paying high prices)
Pros of monopolies
Monopolists can be dynamically efficient as supernormal profit is being made in the long run. Profit can then reinvested back into the company in the form of technology advances, products and R&D= hugely beneficial for consumers who will receive brand new, bettered products over time - perhaps able to purchase products that do not yet exist, Prices could be lowered over time if tech advances reduce costs for businesses- passed on to consumers - choice available to consumers would increase too. For the monopolists 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 over time
Even though monopolist are productively inefficient - may still be exploiting greater economies of scale than smaller competitive firms who produce lower levels of output-
The diagram belove shows how the costs of production can be lower for monopolists at MCm, compared to competitive- given their greater E.O.S exploitation resulting in lower prices charged at Pm and higher quantities produced at Qm than competitive firms. The critique is extremely powerful as it reverses the outcomes of traditional monopoly theory promoting outcomes that
actually benefit society.
Monopolies have the ability to cross subsidise loss making goods or services that consumers desire allowing production of them still taking place. 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
Cons of monopolies
Monopolies produce outcomes that are allocatively inefficient- exploit consumers -charging prices greater than MC at profit maximising level, QM. resources aren’t allocated to consumer demand = consumers getting a lower quantity than they desire. Consumer choice is restricted and prices are high reducing CS. Quality of product being sold may suffer to given lack of competitive forces to meet the needs and wants of consumer. Monopolies get away with allocative inefficiency given lack of competition- consumers are unable to switch their consumption to rival firms
Deadweight loss of both CS and PS. Quantity in market it below social optimum Qm rather than Qc- misallocation of resources allocative inefficiency and welfare loss to society
Monopolies=productively inefficient don’t produce at minimum point on AC curve - forego some EOS. Output will be increased further with lower average cost - doesn’t correspond with profit maximisation MR= MC = productive inefficiency prevails. Consequently consumers suffer from higher prices and lower CS that if all EOS were exploited. Monopolist get away with productive inefficiency given lack of competition.
Monopolies can be productively inefficient if they become too large and suffer from diseconomies of scale. This occurs when output takes place where AC are rising occurring – communication, coordination, and motivation – productivity is reduced due to excessive size of them. Consumer suffer from high prices and lower CS than if monopolist was smaller and benefiting from lower average costs
Monopolies= ex- inefficient –complacent and lazy in production process allowing waste (cost in excess of AC) to come in at quantity QM. Consumers = high prices and lower CS. seems irrational GIVEN strict profit maximisation objective - reality of minimising waste maybe tedious and against interest of managers = time-consuming and height effort. Monopolists can get away with X inefficiency given lack of competition
