monopolies Flashcards

1
Q

characteristics of a monopoly

A
more than 25% market share
high barriers to entry
advertising and product differentiation - product thought to be more desirable and thus gives price making power
few competitors in the market
price making power
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2
Q

profits for monopolies

A

supernormal profits even in the long run

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3
Q

profit max point

A

MC = MR

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4
Q

why do they have supernormal profits

A

supernormal profits not competed away due to high barriers to entry

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5
Q

monopoly efficiencies

A

not productively efficient - MC is not equal to AC at the long run equilibrium point (thus the firm is not operating at the lowest point on the AC curve)

not allocatively efficient - price charged is greater than MC so producers are being over rewarded for the products they are providing

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6
Q

disadvantages of a monopoly

A

may become complacent - no incentive to innovate or respond to changing consumer preferences#

no need to increase efficiency

consumer choice restricted

higher prices for consumers

monopsonist power may be used to exploit suppliers

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7
Q

what is a monopsony

A

a market with a single buyer - can force suppliers to supply cheap because they are the only buyer

however, the low price could be passed onto consumers

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8
Q

advantages of a monopoly for the firm

A

They can charge higher prices and make more profit than in a competitive market

They can benefit from economies of scale – by increasing size they can experience lower average costs – important for industries with high fixed costs and scope for specialisation.

They can use their monopoly profits to invest in research and development and also build up cash reserves for difficult times

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9
Q

why governments might tolerate monopolies

A

It is difficult to break up monopolies. The US government passed a lawsuit against Microsoft, suggesting it should be split up into three smaller companies but it was never implemented.

Governments can implement regulation of Monopolies e.g. OFWAT regulates the prices for water companies. In theory, regulation can enable the best of both worlds – economies of scale, plus fair prices. However, there is concern about whether regulators do a good job – or whether there is regulatory capture with firms gaining generous price controls.

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10
Q

disadvantages of monopoly for the firm

A

inefficient - maybe wasteful spending

may result in diseconomies of scale so the cost per unit increases

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11
Q

advantages of a monopoly to consumers

A

economies of scale could pass down lower costs to consumers
supernormal profit means the firm could invest more to make the product better however it depends on the firm’s aims
certain industries e.g. pharmaceutical with vaccines or medicine - monopoly power and money incentivises firms to research into medicine to become a monopoly and make more money but as a result make something beneficial for society

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12
Q

disadvantages of a monopoly for consumers

A

higher prices for consumers due to lack of competition
lack of choice
less incentive to innovate and make good quality products

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13
Q

disadvantages to workers due to monopoly

A

if the firm is the only one in the market it can abuse the power and lower wages

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14
Q

advantages to workers

A

potentially increase wages due to supernormal profits

increased financial security of firm could increase job security and wages

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15
Q

disadvantages to suppliers

A

monopsony power - single buyer could force the suppliers to sell lower at a loss

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16
Q

advantages to suppliers

A

large bulk orders

good demand level for their products

17
Q

natural monopoly characteristics

A

extremely high fixed costs followed by large economies of scale which are continuous

having several competitors would be inefficient and more expensive

only one firm in the market

18
Q

conditions for price discrimination

A

seller must have some price making power

must b able to distinguish separate groups of customers that have different PEDs

prevent seepage - people buying at low price and reselling themselves at higher price

19
Q

what does price discrimination do for firms

A

transfers consumer surplus to producer in the form of additional revenue

20
Q

what is first-degree price discrimination

A

each individual charged the maximum they are willing to pay, turning all consumer surplus to revenue, however very difficult to gather all this info and difficult to prevent seepage

21
Q

what is second degree price discrimination

A

often used in wholesale markets where lower prices are charged for people who buy in bulk

turns some consumer surplus into revenue and encourages large orders

22
Q

what is third degree price discrimination

A

when a firm charges different prices for different segments of the market eg ages, different times, different places

23
Q

how to maximise profits with third degree price discrimination

A

seller sets price for each group where MC=MR, so higher price for inelastic and lower for elastic

24
Q

advantages of price discrimination

A

results in an increase in revenue for seller

this revenue could be used to further invest in the product to make it better or even cheaper

extra revenue helps fund for people who have less money - income redistribution

25
Q

disadvantages of price discrimination

A

firms may keep the extra revenue for themselves and not reinvest
consumers not treated equally - however usually those who pay more have higher incomes anyway and their extra paying helps fund for people who have less money - income redistribution