Monopolies and Oligopolies

Question 1

What is a:

Monopoly

Answer 1

Monopoly is when there is one dominant seller in a market

Question 2

What is a:

Pure monopoly

Answer 2

A pure monopoly is when there is only one producer in the market

Question 3

What is a:

Natural monopoly

Answer 3

A natural monopoly is when one firm in an industry can serve the entrie market at a lower price than would be possible if the industry were comprised of many smaller firms

Question 4

What is a:

Legal monopoly

Answer 4

Legal monopoly is when a firm has 25% or more of the market share

Question 5

What is a:

Price maker

Answer 5

Pricre maker is where a dominant firm is able to set the price charged in the whole industry

Question 6

What is a:

New entrant

Answer 6

A company that is new to the maket and has not sold products in the market before

Question 7

What is the:

CMA

Answer 7

the Competition and Markets Authority is a government organisation that prevents and reduce anti-competitive behavior. It has the power to rule against activities that are against the public interest and encourages regulators to use their powers.

Question 8

What are:

Utilities

Answer 8

Utilities are essential services which include water supply, electricity, home telephone lines and internet access

Question 9

What is:

Market share

Answer 9

The proportion of sales volume/revenue within a market that can be attributed to one firm

Question 10

What are features of a:

Monopoly

Answer 10

• The monopoly will sell a unique product with no close substitutes
• This is a situation where there is a dominant seller in the market
• These exist when there are very high barriers to entry in the market
• Monopolies act as a price maker as it can raise price by restricting market supply in order to maximise profits.

Question 11

What are:

Abnormal profits

Answer 11

profits made by monopolies because they are much higher than if it had been in a competitive market

Question 12

What is a:

Monopoly power

Answer 12

A firm with more than 25% of market shares

Question 13

What are advantages of:

Monopolies

Answer 13

• Lower average costs of production due to internal economies of scale can lead to lower prices
• Maybe more innovation since the business can sell what is produced anyways and has high profit margins
• Can help not waste inefficient resources e.g. multiple railway companies

Question 14

What are:

Disadvantages of monopolies

Answer 14

• Prices could be higher and lower product quality and service as people will buy their product anyways and it is a quick way to cut costs
• restricted choice
• Can stop innovating to cut costs

Question 15

What are the different:

Barriers to entry

(8 points)

Answer 15

• Economies of scale leading to lower average cost of production (cost barriers)
• High set up costs
• (legal barriers) patents copywrights and government licenses
• marketing barriers
• (artificial barriers to entry) Forwards/backwards/vertical integration - monopoly tie up the supply chain and make life for new potential entrants hard
• Predatory pricing
• Exclusive dealing - threaten firms to stop stocking alternatives or it stops supplying
• cartels - work together in order to achieve market power

Question 16

What is an:

Oligopoly

Answer 16

A market dominated by a few large firms

Question 17

What is:

market share

Answer 17

A firm’s share of the total revenue in the whole market

Question 18

What is:

Collusion

Answer 18

Collusion is where firms infromrally aim to restrict competition by acting together. They may restrict supply of their product in a region or all firms agree to charge the same high price

Question 19

What is:

Cartel

Answer 19

Where are group of firms or countries formally join together and agree on fixing prices or supply

Question 20

What are:

Price wars

Answer 20

Where one firm in the industry reduces price causing others to do the same

Question 21

What is:

Interdependence

Answer 21

Where the actions of one country or large firm will have a direct affect on others

Question 22

What are the features of:

Oligpolistic markets

Answer 22

• Differentiated products are sold
• High barriers to entry
• Potential collusion on pricing, location and supply
• a few firms dominate the market and have a large market share
• these firms benefit from barriers to entry
• Non-price competition to avoid price wars, but product differentiation
• the different firms are interdependent, as the price of one of the firms affects the whole industry, so when doing an action the reactions of the competitors are usually took into account
• these firms benefit from economies of scale leading to decreasing average costs
• Firms may collude to avoid high levels of competition, which is illegal in most countries

Question 23

What are the advantages of:

Oligopolies

Answer 23

• EOS
• Innovation to try to differentiate their product
• Price wars can lead to lower prices
• High quality products as there can be high competition between firms

Question 24

What are the:

Disadvantages of Oligopolies

Answer 24

• DOS
• Collusion leading to a high price for a bad product
• Promotion - if firms do not have price wars they will try to differentiate their product leading to rising costs