LS10- Monopoly

Question 1

What is a monopoly

Answer 1

• A market with a single seller of a good
• Competition and Markets Authority (CMA) are empowered to investigate a merger if combined firm have >25% of market share

Question 2

Assumptions of a monopoly (3 main ones)

Answer 2

• There is a single seller of a good
• There are no substitutes for the good, either actual or potential
• There are barriers to entry/exit

Question 3

Types of inefficiencies in a monopoly

Answer 3

• allocative inefficiency - P>MC: monopolies charging higher than costs, so low consumer surplus as well as limiting output to make these products
• productive inefficiency - foregoing EoS by not producing at lowest on AC, if firm gets too large they may get DoS
• x inefficiency is occuring because of complacency and it is hard to actually cut these costs

Question 4

Monopoly dynamic efficiency

Answer 4

• dynamically efficient as firm is earning supernormal profit, which can be reinvested into improving tech/innovation

Question 5

Pros of monopoly

Answer 5

• dynamic efficiency
• greater EoS potential if the firm is bigger

Question 6

Evaluation of a monopoly

Answer 6

• dynamic efficiency not guaranteed, could pay debts or give shareholder money
• EoS or DoS depends on the size of the firm
• competition/threat of competition - can reduce inefficiencies
• natural monopoly + type of good made here (essentials) - price making abilities could harm consumers

Question 7

Why do monopolies cause DWL?

Answer 7

• reduce the level of societal suplus compared to competitive markets e.g. higher prices -> less consumer surplus
• less competition -> complacency -> lower quality

Question 8

Examples of natural monopolys

Answer 8

• water distributors
• internet distributors
• rail

Question 9

Characteristics of a natural monopoly

Answer 9

• huge fixed cost of infrastructure so potential for EoS - TC is very high so you need very high Q (output) to reduce costs - which means potential for EoS
• rational for one firm to supply the entire market - competition is undesirable, because any firm entering the market doesn’t have EoS, so when they get pushed out they leave all their infrastructure idle - waste
• compeition would result in wasteful depletion of resources and non-exploitation of full EoS - allocative and productive inefficiency

Question 10

Regulation in natural monopoly

Answer 10

• regulators will regulate natural monopolists due to the essential nature of the products being provided