Monopolies Flashcards
What is a monopoly power?
When one firm has more than 25% of market share
- legal monopoly
What is a monopoly?
- When one seller dominates the market
- Different products so price makers
- high barrier of entry/exit - super normal profit
- Imperfect info (Excludes)
- Firm is profit maximiser
what are the two types of monoploies?
- Pure monopoly (rare)
- Molopoly power (25% MS
What are the 4 efficency analysis?
- Allocative efficiency
- Productive efficiency
- X - efficenciy
- Dymanic efficiency
What are the static efficencies?
Can’t increase the production of one good without decreasing another
1. Allocative efficiency
2. Productive efficiency
3. X - efficenciy
What is allocative efficency?
Price = Marginal Costs, Supply = demand
What happens if there is no allocative efficiency?
Exploit customers with higher prices than MC
Lower consumer surplus
Choice decreases
Lack of competitive forces
What is product efficiency?
the ability of a firm to produce goods or services at the lowest possible cost, given the level of output and the available technology
What is X - efficiency?
X Inefficiency occurs when a firm lacks the incentive to control costs = WASTE
- Lack of competivie drive
- Harder to cut costs
What is dynamic efficiency?
occurs over time and is strongly linked to the pace of innovation within a market and improvements in both the range of choice for consumers and also the performance / reliability / quality of products.
- SUPERNORMAL PROFIT
What is supernormal profit?
Excess profit of normal profit
- can be used for capital investments, reinvest can be + and -
What do monopolies to do society?
Reduce society surplus, bad for society can cause market failure
How to show why monopolies cause Deadweight welfare loss
Draw a monopoly graph and use price and quanity of both monopoly and competitive firm
CF - MC (S) = AR (D)
What is price discrimination?
Where firms charge different prices to different consumers for identical goods with no difference in cost of production
What are the 3 conditions needed for price discrimination?
- Price making ability (monopoly power)
- Information separate the market (Different PED - online shopping)
- Prevent re-sale ( market seepage)
What is market seepage?
Resale - a buyer cannot purchase in one market at one price and sell in another at a higher price
What is the first degree of price discrimination?
Firms set price at what consumers and willing and able to pay
- causing no CS, now supernormal profit
What is the second degree of price discrimination?
Certain capacity, so they reduce the price to fill these fixed marginal costs
e.g cinemas, hotels
- Gain CS
What is the third degree of price discrimination?
Exploiting those with inelastic demands (need for commuting) face high prices, whereas those with elastic demand have lower
e.g railways - commuting and leisure travel
What are the negatives of price discrimiation?
- Allocative efficenicy
- Inequality (3rd, low income)
- Anti-competitive prices (3rd)
What are the positives of price discrimination?
- Dynamic efficiency (reinvest)
- Economies of sale (future lower price)
- Benefits some (2nd, 3rd) but doesn’t outweigh the cons
- Cross subsidies (reinvest)
What is a natural monopoly?
This happens with utility providers
e.g Water, railways, electricyt
Characteristics of a natural monoploy
- Huge fixed costs (starter, infrastructure)
- Big potential for economies of scale
- Rational for 1 firm to supply market, so competition is undesireable
- Competition results in wasteful duplicates of resources and non-exploitation of economy of scale
Where is profit maxmising on a graph
when marginal cost = marginal revenue
Why can’t natural monoploies be profit maximisers?
As the products/ service is essential for the nature of society so need regulators to enforce working at allocative efficency
- subsides to cover the LRMC and LRAC difference
Are natural monopolies good?
With subsides they can work at allocative efficiency, where as if there were competition this wouldn’t be the case
Cons of monolpoies
- Allocative inefficiency (£ higher MC, so consumers are exploited
- Productive inefficiency
- X inefficiency (waste)
- Inequalities in necessity markets
Pros of monopolies
- Dynamic efficiency - reinvest
- Greater economies of scale
- natural monopolies
- Crossnsubsidation - reinvestt
Evaluations for monopolies
- Dynamic efficiency (profits can go elsewhere - pay workers)
- Different objectives (no Profit max)
- Regulations
- Type of goods
- Price discrimination
What are the conditions for monopolistic competition
- Many buyers/sellers
- Slightly diff goods - PED, subs
- Low barriers of entry
4 Good info - Non price competitive
- Firms are profit maximisers (MC=MR)
Examples of monoploistic competitiors
Hairdressers, Taxi, restaurants
What hapens in the short run of monoploistic competitiors
Have high supernormal profits, can be profit maximisers
What happens in the long run of monoploistic competitors
New firms will enter as high profits, but demand will shift and will be normal profits
What happens to efficiency during long run of monoploistic competitiors
- No allocative efficiency - high costs, less choice
- No product efficiency
No dynamic efficiency no high profits
How to draw a long run graph for monoploistic competitiors
- AR and MR (demand)
- MC
- Profit max at p
4 AC (semi circle)
