monopolies Flashcards
what is a pure monopoly
when there is only one seller in a market – 100% market share
what is a legal monopoly
one dominant firm has at least 25% market share
what is a dominant monopoly
one firm has at least 40% market share
what type of comp is monopolies
imperfect
what are 4 characteristics of imperfect firms (think opposite of perfect comp)/ monopolies- they they same dawg x
High barriers to entry and exit
No homogenous products- lack of substitutes
Limited or no choice for consumers
Price-makers – monopolists have the power to set prices in their markets. downwards sloping demand curve. To sell more, firms must lower prices which changes MR (not equal to demand)
Ab or supernormal profit in SR and LR
Economies of scale may be significant
are they productively efficient
no
why
because they dont produce at the lowest possible cost (p=mc) as price is above marginal cost to maximize profits
are they allocatively efficient
no
why
they do not produce the quantity of goods that maximizes total societal welfare as they underproduce at a price that is not possible to pay for all potential consumers
are they x efficient
no
why
less incentive to reduce their costs or improve productivity due to the lack of comp pressure and the power over setting prices as they’re price makers
are they dynamically efficient
yuh
why
they’re making super normal profit which can be put into r and d creating barriers to market
what are natural monopolies
One firm can produce the socially optimal quantity at the lowest cost due to economies of scale.
single firm can supply the entire market demand at a lower cost than any combination of multiple firms due to economies of scale
characteristics of a natural monopoly (8)
dont be too hard on yourself for not getting these dawg but also never undermine your academic power cus your clever and you can do it! love you and me and you who is also me #slay #purr
Extremely high set up costs (capital equipment needed)
Results in huge fixed costs
High capital costs are a significant barrier to entry to competition
Only room for one firm to be efficient as the MES is so large
Economies of scale are so great that the most efficient outcome can only be achieved by one firm in the industry
Low marginal cost to supply extra customers
No Competition
Monopoly power not due to unfair practice by firms or an attempt to stifle competition
what is the minimum efficiency scale (MES)
smallest level of LR output a firm can produce whilst taking advantage of internal economies of scale resulting in the lowest possible LRAC
operating efficiently at or near the MES helps increase the firm’s overall profitability by reducing costs.
why is there only firm
very high fixed costs
duplication of scarce resources- wasting resources so not always good as if there’s more than 1 then they wont achieve MES
are they productively efficient
na
allocative efficient?
no dawg
dynamically efficient
yah!
how may a natural monopoly become allocatively efficient
through gov intervention- subsidies!
whats a real life example
severn trent
Ofwat controls prices they charge and dictates the maximum allowed revenue a company can earn,
whats an advantage to do with SNP
Can invest in r&d
more dynamically efficient
Can improve productivity, reduce costs, or enhance product quality.
positive externalities
E.g pharmaceutical companies use high profits to fund drug research
Spillover effect: other companies might use that research to discover related treatments or new production techniques.
Raises the overall innovation level in market
Increasing social welfare beyond the monopoly’s private gains.
whats an advantage to do with econ of scale
as prod increases fixed costs are spread across more units of output, reducing the average cost per unit.
Lowest possible LRAC, operating at MES
Reduces ATC, increases profitability, helps to eliminate X-inefficiency
Reinforces high barriers decreasing contestability as industry that requires sig capital investment costs
Harder for firms to try replicate this
Increase market dominance
Decreases comp pressure may force new or incumbent firms to be more innovative to compete
Consumers benefit increasing TW as receiving lower prices if firms decide pass the benefit of their lower production costs onto consumers and allows for higher quality choice and options better tailored to their wants and needs if other firms are forced to innovate
what is a disadvantage regarding SNP
Faces no immediate comp pressure to innovate efficiently or at the socially optimal level.
Incentive is profit max, not max of social welfare.
Opportunity cost.
Firms could use for financing dividends, executive pay rises, advertising etc.
E.g in 2020, British Gas CEO gave himself a pay rise over 80% to £8.2 mil.
Monopoly SNP benefits a small group (e.g shareholders or execs), not society.
Creates a consumer surplus loss and deadweight welfare loss.
Loss of total welfare- consumers are worse off
They don’t improve product quality, don’t lower prices, and don’t expand output.
Allocative efficiency is not improved (p doesn’t = mc) and consumers continue paying inflated prices so remains inaccessible.
Leading to market failure as resources are not allocated where they are most needed, but rather where they maximize profits.
whats a disadvantage regarding inefficiencies
Inefficiencies in prod= higher p for c, as mon may not lower prices to reflect lower costs, since there is no comp pressure (pm not ppc).
reduction in CS because consumers are paying more than they would in a comp market.
They don’t produce at the lowest possible cost (p=mc) as p is above mc to max profits.
May produce less than the socially optimal, limiting consumer access and causing a deadweight loss.
No substitute so consumers either forced to pay higher costs- exploit them or suffer from underconsumption.
May be a market failure if produces essentials if a natural monopoly e,g severn trent- water.
social inequality- affect low-income consumers who may not be able to afford necessary services.
