Monopolies

Question 1

What is a monopoly

Answer 1

A single supplier that serves the market

Question 2

Why do monopolies arise?

Answer 2

Due to cost advantages of a single firm or due to government intervention

Question 3

What are the cost advantages a monopoly can grow from?

Answer 3

1. Superior technology or organisation (Henry ford and assembly lines)
2. Exclusive control over an important production input (de beers and diamonds)
3. Natural monopoly - average cost curve always downward sloping

Question 4

Causes of monopolies?

Answer 4

1. Government intervention: a government monopoly where a government corporation is the sole provider of a particular good or service and competition is prohibited by law
   e.g., postal systems, railroads etc
2. Patents: temporary monopoly granted to encourage innovation
   e.g., pharmaceuticals, xerox

Question 5

When does a monopoly shut down?

Answer 5

If revenue < variable cost

Question 6

Output decision of monopolies?

Answer 6

Profits maximised when MR = MC

MR ≠ p for a monopolist (as in perfect competition)

Question 7

Monopolists sell ___\

Answer 7

The entire market quantity (Q)

Question 8

Profit maximising behaviour of monopoly is determined by the…

Answer 8

Market demand curve.

• As it is the only supplier, it doesn’t have to consider competitor’s reactions when it changes P or Q
  BUT it is constrained by demand

Question 9

How is a monopoly’s profit maximising behaviour constrained by demand?

Answer 9

Monopolist has to choose a point on the demand curve which maximises profits.

It can either set the price p (resulting in quantity Q) or set quantity q resulting in price p.

Both approaches yield same result.

Question 10

Marginal revenue formula?

Answer 10

MR = dR(Q)/dQ

MR = dp(Q)/dQ * Q + p(Q)

dp/dQ * Q -> loss on existing sales

p(Q) -> revenue from new sales

Question 11

For a perfectly competitive firm.. MR equals..?

Answer 11

MR = p

Question 12

As dp/dQ < 0, we have MR___

Answer 12

MR < p

Question 13

We can also write marginal revenue as a function of the PED

Answer 13

MR = p(Q)(1 + 1/PED)

Question 14

A monopolist will NEVER operate on the inelastic part of a demand curve

Answer 14

If demand is inelastic -1 < PED < 0

MR is negative because

MR = p(Q)(1+1/PED)

Question 15

MC are NEVER NEGATIVE why?

Answer 15

Otherwise total cost would go DOWN when more output is produced.

Question 16

On the inelastic part of a demand curve what is the relationship between MR and MC

Answer 16

MR < MC

The monopolist could increase profits by producing less

Q down, R up, C down so profits up

So it isn’t true that monopolists produce goods with inelastic demand

Question 17

Compared to perfectly competitive outcome..?

Answer 17

Monopoly has lower output and higher price
Monopoly has lower welfare

Question 18

To maximise welfare, monopoly can produce where…?

Answer 18

P = MC

Question 19

How to prevent or regulate monopolies?

Answer 19

1. Deregulation - Deregulation reduces monopolies by removing government restrictions, allowing more companies to enter a market and compete, which helps prevent a single dominant player.
2. Trade liberalisation
3. Competition policy - CMA investigate anti-competitive practices and, if necessary, take actions to promote a competitive marketplace. UK 🇬🇧
4. Structural remedies
5. Conduct remedies

Question 20

What is a structural remedy?

Answer 20

Trying to alter industry structure to make it more competitive.

• Block mergers to prevent creation of market power
• Force companies to restructure their business in a way that fosters competition
• Break up companies (RARE)

Question 21

Why are structural remedies not always feasible?

Answer 21

• Remedies and breakup of companies are highly complex & costly to implement
• Sometimes not also desirable eg with natural monopolies

Question 22

What are conduct remedies?

Answer 22

Gov, intervention to restrict a monopolists behaviour without changing the underlying market structure

• Prevent firms from fixing prices and forming cartels
• For natural monopolies, directly intervene in the price setting process of the firm

Question 23

Most common way of regulating monopolies?

Answer 23

• Set a price ceiling at the competitive price
  (= MC)

Question 24

Why do monopolies lead to welfare losses?

Answer 24

Because output is lower in a monopoly than in perfect competition

Question 25

Price regulation can eliminate welfare losses but ?

Answer 25

It’s difficult to implement