Monopolies Flashcards
What are 5 characteristics of a monopoly?
- One seller/firm
- Unique product
- High barriers to entry/exit
- PRICE-MAKERS
- Imperfect Information
Can firms enjoy supernormal profits in the long-run? (monopoly)
Yes.
Due to there being very high barriers to entry, there is one a single seller, thus the firm can benefit from supernormal profits even in the long run.
What is price discrimination?
Price discrimination occurs when a seller charges different prices to different consumers for the same product - not for reasons associated with differences in costs.
A monopoly will exploit the fact that some people are willing and able to pay a higher price than others.
This is practised to increase profits.
What are the 3 conditions for successful price discrimination?
- Firms must have some form of monopoly power to be price-makers. However, they don’t necessarily need to be a pure monopoly.
- Firms must be able to split the market into segments. Markets need to be kept separate, without any re-sale possible. For ex, services can be easily kept separate.
- Conditions in each market must be different, with different elasticities.
Mention some advantages of a monopoly.
- Stability during adverse times - a monopoly can have huge reserves, due to all the accumulated supernormal profits.
- Low risk of unemployment
- Price stability, because there are no price wars.
- Large firms enjoying economies of scale are necessary for countries in order for them to compete in the European or even global market.
- State monopolies do not have the objective of maximising total profit, thus consumers can benefit from lower prices, and firms benefit from lower taxes.
- Monopolies do not need to spend a lot on advertisement, therefore less money is ‘wasted’, so prices won’t have to increase.
Mention the disadvantages of a monopoly.
- A lot of political influence and economic power is in the hands of a few.
- There may be unequal distribution of income (this is very true with large monopolies)
- Lack of variety for consumers
- Lack of options for people seeking employment in a particular industry.
Can firms earn supernormal profits in the short run?
Yes.
Can firms sustain losses in the long run?
No.
Will the market lead to productive efficiency in the long run?
No.
Will the firm lead to allocative efficiency in the long run?
No.
Give examples of monopolies in real life.
Electric Utilities, Airports (in the case of Malta at least)
Define deadweight loss.
Deadweight loss can be defined as a cost to society created by market inefficiency. This occurs when supply and demand are out of equilibrium. It is lost society welfare. This loss to society is caused by monopolies and their profit-maximising rule, since they are not allocative efficient. Therefore, they are under-allocating their resources. Therefore, society’s welfare decreases under a monopoly.
