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A Level Economics Year 2 > MICRO - monopoly ✅ > Flashcards

MICRO - monopoly ✅ Flashcards

1
Q

what is arbitrage

A

buying and re-selling of securities, currency, or commodities in different markets to take advantage of differing prices for the same asset

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2
Q

what is bi-lateral monopoly

A

Where a monopsony buyer faces a monopsony seller in a market

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3
Q

what is a concentration ratio

A

Measures the proportion of an industry’s output or employment accounted for by the largest firms

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4
Q

what is a dominant firm

A

Business with more than 40 percent of market share

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5
Q

what is an industry regulator

A

Appointed by government to oversee how a market works and the outcomes that result for producers and consumers

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6
Q

what is legal monopoly

A

A monopoly that is protected by law from competition e.g. through patents or government- awarded franchise

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7
Q

what is market liberalisation

A

Introducing competition in previously monopolistic sectors such as energy supply, retail banking and postal services

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8
Q

what is limit pricing

A

When a firm sets price low enough to discourage new entrants into the market

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9
Q

what are entry barriers

A

Strategies used to protect the market power of established firms whilst maintain supernormal profits

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10
Q

what is market segmentation

A

Splits up a market into different types (segments) to enable a business to better target its products to the relevant customers

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11
Q

what is market power

A

Power to raise price above marginal cost without fear of losing supernormal profits to new entrants

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12
Q

what is monopoly profit

A

Supernormal profit to a firm with market power, achieved when price (AR) > average cost

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13
Q

what is natural monopoly

A

when long-run average cost (LRAC) falls continuously over a large range of output so only one firm can fully exploit economies of scale

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14
Q

what is price discrimination

A

charging different prices to different groups of consumers for the same product for reasons not associated with the marginal cost of supply

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15
Q

what is regulated monopoly

A

A business with market power regulated through price-capping or some other form of intervention

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16
Q

what is welfare loss

A

Overall reductions in consumer welfare when firms use their market power to raise price above a competitive level

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17
Q

what is a working monopoly

A

Business with more than 25 percent share of a defined market

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18
Q

what is predatory pricing

A

A deliberate strategy of driving competitors out of the market by setting very low prices or selling below AVC

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19
Q

what is pure monopoly

A

The only supplier in an industry - with a 100 percent market share. The firm is the industry

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20
Q

what is third degree price discrimination

A

Charging different prices for the same product in segments of the market. Price is linked directly to consumers’ willingness and ability to pay for a good or service

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21
Q

what is willingness to pay

A

The maximum price at or below which a consumer will definitely buy one unit of a product.

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22
Q

what is x-inefficiency

A

When the lack of competition leads to higher average costs than necessary to supply a given level of output

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23
Q

what are monopolies characterised by (6)

A
  • profit maximisation. A monopolist earns supernormal profits in both the short run and the long run (operate where MR = MC)
  • sole seller in a market (a pure monopoly)
  • high barriers to entry
  • price maker with downward sloping demand curve (AR)
  • price discrimination
  • if AR is falling, marginal revenue (MR) is below AR
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24
Q

what is monopoly power influenced by (4)

A
  • barriers to entry: the higher the barriers, easier for firms to maintain monopoly
  • number of competitors: few firms, lower barriers, harder to gain large market share
  • advertising: can increase consumer loyalty, make demand price inelastic and create barrier to entry
  • degree of product differentiation: more differentiated through quality and branding, easier to gain market share because unique product = few competitors
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25
Q

what are barriers to entry that can maintain monopoly power (6)

A
  • Economies of scale: firms grow larger, the AC of production falls means existing large firms have cost advantage over new entrants to the market = maintains their monopoly power. deters new firms entering the market, they can’t compete with existing firms.
  • limit pricing: involves existing firm setting price of good below production costs of new entrants, ensure new firms cannot enter profitably
  • owning a resource: Early entrants to a market can establish their monopoly power by gaining control of a resource
  • Sunk costs: If unrecoverable costs are high in an industry, new firms will be deterred from entering the market, because if they are unable to compete, they do not get the value of the costs back.
  • Brand loyalty: consumers very loyal to a brand, can be increased with advertising = difficult for new firms to gain market share
  • Set-up costs: expensive to establish the firm, new firms unlikely to enter
26
Q

where is profit maximisation in a monopoly

A

the firm is the sole supplier in the market so its cost and revenue curve is the same as the industry’s as monopoly is a price maker

P > MC due to profit maximisation occuring at MR = MC, allocative inefficiency in monopoly

AR > AC so supernormal profits

27
Q

what is a natural monopoly

A

occurs when a large business can supply a market at a lower price than smaller ones.

A natural monopoly is a situation in which there cannot be more than one efficient provider of a good.

It is an industry where the minimum efficient scale is a large share of market demand

28
Q

how is a natural monopoly characterised

A

a natural monopoly is characterised by increasing returns to scale at all levels of output

29
Q

what happens to LRAC in monopoly

A
  • the long run cost per unit (LRAC) will drift lower as production expands
  • LRAC is falling because long run marginal cost is always below LRAC
30
Q

how is a natural monopoly different to other industries (chain of reasoning)

A

natural monopoly when one business can supply market at lower unit cost than with multiple providers —> because of very high fixed costs and low marginal costs —> eg// the supply of water or electricity to houses and businesses involves building a network infrastructure —> therefore, average total cost will continue to fall as extra users are added. internal economy of scale —> means that LRAC may fall across all ranges of output. only one firm might reach the minimum efficient scale

31
Q

what is an advantage in terms of profit of a monopoly (3)

A
  • supernormal profits = invested in research and development = yielding positive externalities = monopoly more dynamically efficient in the long run
  • = more invention and innovation
  • firms more likely to innovate if they can protect ideas. likely to happen with high barriers to entry
32
Q

can monopolies exploit economies of scale

A

Large monopolies mean they can exploit economies of scale, and have lower average costs of production

33
Q

how do monopolies help society

A
  • Can generate export revenue eg Microsoft generates lots of export revenue for America
  • High profits could be a source of government revenue through taxation
34
Q

are monopolies efficient

A
  • Have no incentive to become more efficient, because they have few or no competitors = high production costs
  • Basic model suggests higher prices, profits and inefficiency results in misallocation of resources compared to outcome in competitive market
35
Q

how do monopolies affect consumer/producer surplus

A

Loss of consumer surplus and a gain of producer surplus.

If monopolist raises market price above the competitive equilibrium level, output will fall from Q1 to Q2.

= gains in producer surplus.

36
Q

what is a disadvantage to the consumer of a monopoly

A

Consumers don’t get as much choice in a monopoly as they do in a competitive market

37
Q

what is the standard case against monopoly

A

standard case against monopoly is that it leads to a loss of economic efficiency which can then cause reductions in the welfare of consumers affected. But this view can be challenged as part of evaluation.

38
Q

economic case against monopoly (5)

A
  • Prices higher than under competitive conditions:
    —> = loss of allocative efficiency (because monopoly price > MC)
    —> Higher prices have regressive effect on lower-income households
  • Absence of market competition leads to production inefficiencies:
    —> EG// wasteful production and advertising spending
  • Higher prices = limit output in a market and = fewer economies of scale being exploited
  • Protected markets = less drive to innovate = less dynamic efficiency
  • Monopoly may get too big = one or more diseconomies of scale – leading to rising LRAC
39
Q

case for monopoly (5)

A
  • Profits used to fund investment & research
  • natural monopoly allows for applications of economies of scale = lower prices
  • Domestic monopoly businesses often face global competition
  • Monopolistic firms can be regulated – i.e. an industry regulator acting as a proxy consumer
  • Price discrimination may help some consumers if charged a lower price than the usual monopoly price
40
Q

evaluation of monopoly power (5)

A
  • natural monopoly – it might be more productively efficient to have a monopoly supplier
  • competition in the supply chain – possible to introduce competition at different stages of the supply chain e.g. via competitive tendering, franchises
  • “In theory …. But in practice”: Best to judge a monopoly on a case by case basis using evidence- based approach to how a monopoly actually behaves in the market. powerful evaluation tool!
  • contestability – the threat of entry into a market can be a powerful influence on firms with monopoly power
  • definition of the market – a business might have monopoly power domestically but face international competition
41
Q

what is a monopsony

A

Monopsony has buying or bargaining power in their market, this is different to a monopoly, which has dominant selling power

42
Q

what does a monopsony enable

A
  • buying power = monopsony can exploit bargaining power with supplier to negotiate lower prices.
  • reduced cost of purchasing inputs increases profit margins
  • EG // the government is a major buyer eg in military procurement
  • EG //food retailers have power when sourcing and purchasing supplies direct from farmers etc
43
Q

benefits to firms of monopsony (3)

A
  • Monopsony power allows bigger firms to achieve purchasing economies of scale leading to lower long run average costs
  • lower purchase costs bring about higher profits and increased returns for shareholders
  • the extra profit might be used to find capital investment or research and development
44
Q

benefits to firms of monopsony

A
  • allows bigger firms to achieve purchasing economies of scale leading to lower long run average costs
  • lower purchase costs bring about higher profits and increased returns for shareholders
  • extra profit used to find capital investment or research and development
45
Q

benefits to consumers of monopsony power

A
  • consumers gain from lower prices e.g. supermarkets negotiate better prices from manufacturers that are then passed on to consumers
  • improved value for money –the NHS can use its bargaining power to cut the prices of drugs used in treatments. Cost savings allow for more treatments within the NHS budget
46
Q

drawbacks of monopsony power

A
  • businesses may use their buying power to squeeze lower prices out of suppliers, reduces the profits of firms in the supply chain and causes lower incomes
  • the battle of milk farmers to get a higher price from supermarkets covering average cost of their milk (i.e. avoid subnormal profits, threat of closure)
  • consumers faced with less choice/ higher prices in long run if some suppliers leave the market
47
Q

what are Paul Krugman’s opinions of monopsony power

A

In 2014 he wrote “Amazon is acting as a monopsony, a dominant buyer with the power to push prices down. By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers”

48
Q

what is price discrimination

A

when a business charges different consumers different prices for the same good or service
Price variations do not fully reflect the marginal cost of supplying a product e.g. higher costs for parcels delivered over short and long-haul distances in the UK and overseas might be built into the price

There are several types of price discrimination
* 1st degree discrimination
* 2nd degree discrimination
* 3rd degree discrimination

49
Q

aims of price discrimination

A
  • to increase total revenue by extracting consumer surplus and turning it into producer surplus
  • to increase total profit providing the marginal profit from selling to customers is positive
  • to generate cash-flow especially during a recession
  • to increase market share and build customer loyalty
  • to make more efficient use of a firm’s spare capacity
  • to reduce the amount of waste and cut the cost of keeping products in stock / storage
50
Q

what are the degrees of discrimination

A

1st degree - Charging different prices for each individual unit purchased – i.e. people pay their own individual willingness to pay
2nd degree - Prices varying by quantity sold e.g. bulk purchase discounts, prices varying by time of purchase e.g. peak-time prices
3rd degree - Charging different prices to groups of consumers segmented by price elasticity of demand, income, age, sex

51
Q

what are conditions for price discrimination

A
  1. Firms have sufficient monopoly (market) power - Monopolists always have pricing power – i.e. they are price makers not takers
  2. Identifying different market segments i.e. groups of consumers with different price elasticities of demand
  3. Ability to separate different groups - Requires information / market intelligence on purchasing behaviour of consumers
  4. Ability to prevent re-sale (arbitrage)- No secondary markets where arbitrage can take place at intermediate prices e.g. compulsory use of ID cards
52
Q

what are the costs involved with first degree price discrimination

A
  • hard to achieve unless a business has full information on every consumer’s individual preferences and willingness-to-pay.
  • cause costs to be very high, which might outweigh the gains of increased revenue.
  • However, dynamic pricing in online-based markets gives businesses a stronger chance of achieving this
53
Q

what method is cost effective in third degree price discrimination

A
  • more cost-effective for firms (and consumers) to work with price lists / menus, since this can enable trade / transactions to take place quicker without individual negotiations having to take place
54
Q

what happens with market segmentation

A
  • when monopoly power is able to perfectly segment the market into individual consumers, its average revenue (AR) curve becomes the same as the marginal revenue (MR) curve.
  • the firm will continue to sell additional units so long as the extra revenue exceeds the marginal cost of production
55
Q

what are the advantages of price discrimination

A
  • Lower prices for some groups of consumers, who might not otherwise be able to afford it, widening market access
  • More profits can result in higher dividends for shareholders and a positive wealth effect
  • More profits lead to reinvestment / business growth as well as R&D
  • Businesses making better use of spare capacity, increasing demand in quieter times and reducing overcrowding / excess demand at leak times
56
Q

how are prices perceived as a disadvantage of monopoly

A

Higher prices for some consumers, leading to a loss of consumer surplus and a reduction in allocative efficiency, if P>MC; the consumer surplus is reallocated into producer surplus (i.e. profit)

57
Q

how can disparities be a disadvantage of monopolies

A
  • Can increase regional inequality if some consumers can only access goods/services at higher prices
  • Groupings of consumers is not perfect e.g. well-off adults taking school courses may have a student card to access student discounts, despite being able to pay the normal adult price
58
Q

what are other disadvantages of monopolies

A
  • May be an increase in transaction/administration costs for businesses, they have to ensure that the market is sub-divided and consumers in each group are kept separate e.g. checking ID documents. This can possibly reduce profit.
  • Additional profits from price discrimination may allow firms to adopt anti-competitive practices e.g. predatory pricing, higher entry barriers through more spending on advertising etc. This can establish the firm’s dominant market position and cause even higher prices in the future.
59
Q

general evaluation of monopoly

A
  • The impact depends on the extent to which price discrimination is used
  • The impact depends on how businesses choose to use profits
  • It is very difficult in practice to agree on a ‘fair price’ – it is a matter of perspective
60
Q

what is an example of peak/off peak pricing and why

A
  • uber uses surge pricing – also known as dynamic pricing
  • When market demand exceeds available supply e.g. at peak times, then Uber raises the average fare on their app
  • The aim is to encourage more drivers to take to the roads to expand supply
  • The business is taking advantage of low price elasticity of demand at busy times
  • Some economists have criticised this policy especially during emergencies such as freak weather events

A Level Economics Year 2 (15 decks)

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