monopolies Flashcards
perfect competition
-many buyers and sellers (infinite)
-homogenous goods (identical)
-firms are price takers
-no barriers to entry/ exit
-perfect information
-firms are profit maximisers ( produce where MC =MR)
LR in perfect competition
defined as where normal profit is being made, any profit outside normal profit is a short run equilibrium in perfect competition
SR in perfect competition
supernormal profit
SR position for firms is not going to last in the long run
this profit will attract new firms to enter the market with no barriers to entry and perfect info etc.
as they enter, supply shifts right, price falls and this keeps happening until there is no incentive to enter the market (i.e. no supernormal profit and only normal profit is left)
SR in perfect competition
subnormal profit
firms will be incentived to leave the market and to produce their opportunity cost instead and can leave the market with no barriers to exit
as they leave supply shifts left, increasing price, this keeps happening until there is no incentive to leave and normal profit is left
LR for perfect competition
-Allocative efficiency
-productive efficiency
-x efficiency
statically efficient NOT dynamically efficient
shut down condition
AR = AVC (condition if loss if shutdown = loss if continue)
AR < AVC - definetely shutdown
break-even condition
AR = AC, normal profit
if AR > AVC continue for now
pure monopoly
one firm with 100% market share
monopoly power
one firm has around 25% market share (legal monopoly)
monopoly
-one seller dominating the market
-differential products - firm is a pprice maker
-high barriers to entry/ exit
-imperfect information
-firm is a profit maximiser, mr = mc
monopoly efficiencies
allocative efficiency
-NOT allocatively efficient as they are charging a price greater than MC, exploiting consumers
-high prices, lower CS, restricted output, choice lower as resources are not following consumer demand
possibly decrease in quality
monopoly efficiencies
productive efficiency
NOT productively efficient as they are intentiently foregoing EoS by not producing by not producing at minimum of AC curve
reason why increase in price
monopoly efficiencies
x- efficiency
NOT x-efficient as producing above AC curve, possibly due to complacency
difficult to reduce x - inefficiency
monopoly efficiency
dynamic efficiency
LR supernormal profit being made
re-investment
DWL for monopolies
firms are profit maximisers and have a higher price and lower quantity
monopolies reduce the level of society surplus
consumers exploited massively through higher prices
argue that monopolies are a serious cause of market failure
price discrimination
where a firm changes different prices to different consumers for an identical G/S with no differences in costs of production
conditions necessary for price discrimination
-price making ability (monopoly power)
-information to separate the market, inelastic = high, elastic = low
-prevent re sale ( market seepage)
1st degree price discrimination
when consumers are charged the exact price theyre are willing to pay completely eroding CS, into monopoly profit
2nd degree price discrimination
excess capacity pricing
when a firm with a fixed capacity (airline/ train seats, hotel, cinema etc.), makes no sense to keep any capacity idle to pay fixed costs so they lower prices last minute to fill capacity and contribute to fixed costs
3rd degree price discrimination
when a firm is able to segment the market into different price elasticities of demand
one group with inelatsic demand and other group with elastic demand, firms recognise it by age, income etc.
e.g. rail company - inelastic (commuter) need to go to work, elastic - travellers
MC is constant as cost to fill one extra seat is same
profit maximise MC = MR
cons of price discrimination
-allocative inefficiency (exploiting consumers)
-inequality
-anti-competative pricing (lower prices drives out competitors = lack of competition)
pros of price discrimination
-dynamic efficiency
-economies of scale
-some consumers benefit
-cross subsidisation
natural monopoly
water/ gas/ internet distributers
railway providers
natural monopoly aspects
-huge fixed and start up costs
-enormous potential for EoS
-rational for a firm to supply the entire market, competition is not desirable
-competition would result in a wasteful duplication of resources and non exploitation of full EoS, allocative and productive inefficiency as first firm in market has the EoS and price advantage, so other firms will be forced out leaving behind infastructure which is wasteful
MES for natural monopoly
potential for EoS is huge, high TC, so to minimise AC, quantity must be very high
LRAC is downward sloping for a hge quantity range so MES occurs at a very high output
regulators role in natural monopolies
high prices, low quantities, regulators wont like this as consumers wont be able to afford water, transport etc.
cannit run a the social optimum as AR < AC leading to subnormal profit - leave market
subsidy per unit given by regulator covers loss, allows firm to make normal profit, little incentive for private natural monopoly
cons of monopoly
-allocative inefficiency
-productive inefficiency
-x - inefficiency
-inequality in necessity markets (regressive)
pros of monopolys
-dynamically efficient
-greater EoS - MCm lower than MCc due to greater EoS, therefore a profit maximising monopolist charges a lower price then a allocative efficient competitive firm
-a regulated natural monopoly gives socially desirable outcomes oppose to NM with competition
-cross subsidisation
evaluation points for monopolies
-dynamic efficiency (will it occur and what will be done with it, saved, debt, pay stakeholders etc.)
-EoS or DoS
-objective, assume monopoly is profit max
-regulation (reduces inefficiencies)
-price discrimination can exaggerate cons
-competition
-natural monopoly
-type of G/S
monopolistic competition aspects
-many buyers and sellers
-slightly differentiated goods
-firms are price makers, only slightly as there are good subs so cant massively increase price
-price elastic demand
-low barriers to entry / exit
-good information
-non-price competition(as they cant raise price for full exploitation)
-assume firms are profit maximisers
monopolistic competition example markets
clothing markets, taxis, resturants etc.
LR monopolistic competition
in the long run, firms enter the market(low BtoE) by supernormal profits
as they enter demand for individual market shifts left as consumers are shared, keeps shifting left until AR = AC, normal profit is made
LR monopolistic competition conclusions
allocative efficiency not achieved in LR means consumers exploited, prices > costs etc.
-productively inefficient as costs arent minimised
-no LR supernormal profits so not dynamically efficient
LR monopolistic competition conclusions counter arguements
-AE - price making ability is lower so exploitation is minimised
perfect competition has homogenous goods, no choice, consumers willing to pay more for more choice
-PE - good substitutes so firms can afford to forego EoS, in PC EoS is small, PE not achieved due to differentiation
-DE could occur as SR supernormal profit could be used or re-invested normal profit to keep up with competition despite it being small
