Monopolies

Question 1

What is a pure monopoly and give an example

Answer 1

A pure monopoly is a single seller that controls 100% of a market. The closest example to a pure monopoly is the London Underground system

Question 2

What is a working monopoly and give examples

Answer 2

A working monopoly is a firm with 25% market share
A dominant firm is a firm with 40% market share
Tesco is a working monopoly but also within an oligopoly

Question 3

How can monopoly powers grow

Answer 3

Monopoly power can come from successful internal growth of a business or through successful mergers or acquisitions also known as the integration of firms

Question 4

What is horizontal integration ?

Answer 4

This is where two firms join at the same stage of production. For example two car manufacturers may decide to merge, or a leading bank successfully takes over another bank

Question 5

What are the barriers to entry and exit within a monopoly market ?

Answer 5

Patent protection
Sunk costs
Brand loyalty
Marketing, advertising and branding

Question 6

What are the characteristics of a monopoly ?

Answer 6

A monopoly market is a market which is 100% dominated by one firm
- Power to set prices is there
- supernormal profit
- Barriers to entry and exit -patents (when a company designs a product they can get a patent to prevent anyone else from selling that product)
- Sell a differentiated good as opposed to a homogeneous good
- Marketing, advertising and branding are all forms of barriers to entry as different packaging causes customer loyalty where they will only buy from that company

Question 7

How does a monopoly power lead to market failure ?

Answer 7

Main case against monopolies is that it makes higher profit at the expense of the loss of allocative efficiency
The monopolist will seek to attract a price from the consumer above the cost of resources used in making the product
Higher prices means that consumer needs and wants aren’t being satisfied, as the product is being under consumed
Higher prices cause a loss of consumer surplus and welfare and will disproportionately effect lower income families

Question 8

What are the key advantages of monopolies ?

Answer 8

Profits used to fund investment and research
Natural monopoly - using economies of scale
Domestic monopoly may face global competition
Monopolistic firms can be regulated i.e. an industry regulator acting as a proxy consumer
Price discrimination may help some consumers