Monopolies Flashcards
What does the UK define as a monopoly power?
When a firm supplies at least 25% of a market.
What is a pure monopoly?
When one firm is the sole producer in an industry.
What are the 3 characteristics of a monopoly?
1) The monopolist is the only firm in the market.
2) Barriers to entry prevent others from entering the market.
3) The monopolist is a profit maximiser in the short-run.
What is a natural monopoly?
A monopoly where the high cost of start-up means that competition is impossible.
Why, in a monopoly, is the demand curve for the firm and for the industry the same?
As the monopolist is the only firm in the industry, the firm is the industry.
What is third degree price discrimination?
The action of selling the same product at different prices to different buyers, in order to maximize sales and profits.
What are the 4 conditions for price discrimination to be possible?
1) A firm must have the market power to vary the price.
2) The different groups of consumers must have different PEDs - one elastic, and one inelastic.
3) Firms must have the information necessary to distinguish between different customers willingness to pay.
4) Consumers cannot have the ability to resell the product.
What are 6 drawbacks to a monopoly?
1) Less incentive for producers to be efficient/develop new products
2) Higher prices for consumers compared to competitive markets.
3) Monopolies are not productively efficient.
4) Monopolies are not allocatively efficient, producing at P>MC.
5) Can abuse market power with suppliers, by insisting on lower prices.
6) The ability to pay workers low wages.
What are 4 benefits to monopoly?
1) Supernormal profit provides the finance to develop new products.
2) Monopolists can take advantage of economies of scale, allowing for the ability to charge lower prices, compared to competitive markets.
3) Price discrimination helps different types of consumers.
4) Monopolists are large employers with lots of opportunities for career progression.
