monopoly Flashcards
What are the characteristics of a monopoly
High barriers to entry and exit
One dominant buyer in the market
Price makers
differentiated products
Imperfect information
At what output level do monopolies produce at
MR=MC
How can monopoly firms price discriminate
Charge higher prices to consumers with inelastic demand
Charge lower prices to consumers withe elastic demand
Define 3rd degree price discrimination
Charge different prices to different consumers for the same good
What characteristics allows firms to price discriminate
T.I.P
TIme
Income
Place
Elasticity
What are the conditions required for price discrimination
- sufficient monopoly power
- identify different segments in the market
- ability to separate different groups - market intelligence
- preventing resale of goods( market seepage)
What are the advanatges to firms of price discrimination
- increase revenue by increasing producing surplus - but decreasing producer surplus
2.increase market share - cheaper to sell to an existing consumer.
- to make firms more efficient by using their spare capacity –> reduces waste –> more likely to be dynamically efficient
4.Potential for cross subsidy of activities that bring social benefits ( lower prices for developing countries or lower incomes)
- bring new consumers into the market which existing consumers couldn’t be able and willing to pay a higher price
What are the disadvantages of a monopoly
- Too big - diseconomies of scale
- Less innovation
- X-ineffciency : lack of competition - less incentive to be efficient to reduce LRAC
- regressive effects on lower income households
- Not allocatively or productively efficient
- misallocation of resources as the price charged is above the MC
Whats the difference between a pure monopoly and having monopoly power
Pure monopolies - 1 firm in the market
Monopoly power - 25% market share
How do monopolies maintain their price making abilities
Restrict output - making the good more scare - restricting supply - increasing the price
How are firms able to be dynamically efficient in the long run
High barriers to entry
Imperfect information
What are the disadvantages price discrimination
- Not allocatively efficient ( exploiting of consumers)
- Inequality could lead to a bad reputation
- Loss of consumer surplus
- Anti-competitive pricing –> low prices could drive competitors away
What is a natural monopoly
When the market is so big it cant realise its economies of scale , if one more firm were to be in the market it would be highly inefficient
What are the characteristics of a natural monopoly
HIGH fixed costs
Potential for economies of scle - Minimum Efficient Scale is very low
Irrational for competition - waste of resources if a are firm were to enter the market - they’d be allocatively and productively inefficient
How may governments or regulators intervene within a natural monopoly market
GOV
- subsidies to reduce their costs so they can lower their prices and make normal profits
- increase cooperation tax
REGULATORS
