Monopolies and Oligopolies Flashcards
What is a:
Monopoly
Monopoly is when there is one dominant seller in a market
What is a:
Pure monopoly
A pure monopoly is when there is only one producer in the market
What is a:
Natural monopoly
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
What is a:
Legal monopoly
Legal monopoly is when a firm has 25% or more of the market share
What is a:
Price maker
Pricre maker is where a dominant firm is able to set the price charged in the whole industry
What is a:
New entrant
A company that is new to the maket and has not sold products in the market before
What is the:
CMA
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.
What are:
Utilities
Utilities are essential services which include water supply, electricity, home telephone lines and internet access
What is:
Market share
The proportion of sales volume/revenue within a market that can be attributed to one firm
What are features of a:
Monopoly
- 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.
What are:
Abnormal profits
profits made by monopolies because they are much higher than if it had been in a competitive market
What is a:
Monopoly power
A firm with more than 25% of market shares
What are advantages of:
Monopolies
- 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
What are:
Disadvantages of monopolies
- 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
What are the different:
Barriers to entry
(8 points)
- 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
What is an:
Oligopoly
A market dominated by a few large firms
What is:
market share
A firm’s share of the total revenue in the whole market
What is:
Collusion
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
What is:
Cartel
Where are group of firms or countries formally join together and agree on fixing prices or supply
What are:
Price wars
Where one firm in the industry reduces price causing others to do the same
What is:
Interdependence
Where the actions of one country or large firm will have a direct affect on others
What are the features of:
Oligpolistic markets
- 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
What are the advantages of:
Oligopolies
- 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
What are the:
Disadvantages of Oligopolies
- 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
