Monopoly Flashcards
characteristics of a monopoly
- One seller dominating the market
- Pure monopoly (theoretical extreme one firm = 100%) or monopoly power (legal monopoly, 25+% power)
- Differentiated products – firm is a price maker
- High barriers to entry/ exit – SNP can persist over time
- Imperfect information
- Firm is a profit maximiser - MR = MC
statically?
- Allocative efficiency – P>MC monopolies charging higher than costs, so low consumer surplus as well as limiting output to make these products – q1 could be higher
- Productive efficiency – forgoing EoS, by not producing at lowest AC, if firm gets too large, then they may get DEoS.
- X efficiency – X inefficiency is occurring because of complacency and it is hard to actually cut these costs
inefficient
dynamically?
- efficient as firm is earning SNP, which can be reinvested into improving tech/ innovation.
PROS
- Dynamic efficiency, producers could gain patents
- Greater EoS potential if the firm is bigger
- Natural monopoly
- Cross subsidisation
CONS
- Allocative inefficiency – less consumer surplus, as price> MC, restricted output/quality/choice + DWL of CS
- Productive inefficiency – forgo EoS, not at minimum costs, so price is not minimized
- X inefficient – complacency
- Inequalities in necessity markets – poor could suffer more in groceries and food/ drink markets
EVAL
- Dynamic efficiency not guaranteed, could pay debts or give shareholder money
- Eos or DEoS depends on the size of the firm
- Objective – what if objective is sales max
- Regulation – can reduce inefficiencies
- Price discrimination can exaggerate the negatives of monopolies
- Competition/ threat of competition which could reduce inefficiencies
- Natural monopoly + type of good made here – essential good is not good for consumers
why do monopolies cause DWL?
- reduce the level of society surplus compared to competitive markets.
- Society surplus at pcqc is area A+B+C+D+E
- Society surplus at PmQm = A+B+D
- DWL of consumer surplus of C
- DWL of producer surplus at E
Natural monopoly e.g.
- water distributors
- internet distributors
- rail
characteristics of natural monopoly
- Huge FC of infrastructure , so potential for EOS, AC = TC/Q, if TC is so ridiculously high, then you need very high Q to reduce costs – which means potential for economies of scale - MES point will occur at a high quantity level
- Rational for one firm to supply the entire market – competition is undesirable, because any firm entering after the first doesn’t have EoS market, so when they get pushed out, they leave all their infrastructure idle – a waste
- Competition would result in a wasteful duplication of resources and non-exploitation of full EoS – allocative and productive inefficiency
regulation in natural monopoly
- Regulators will come regulate the natural monopolists due to the essential nature of the products being provided.
regulated to
allocatively efficient point, but firm is making a loss
how to cover subnormal profit as a result of regulation
Usually a subsidy will be provided that covers this loss. However in the long term, although consumers are benefitting, there’s no incentive for natural monopolists, so most of these industries are state run.
pointless to encourage competition since
would raise average costs for the industry. If any new firm enters the market, they will be easily priced out as their costs will be so much higher.
impact of natural monopoly on firms:
● Monopolists have potential to make huge profits for shareholders through profit max
● existence of SNP means firms have finance for investments and able to build up reserves to overcome ST difficulties.
● Firms with monopoly power able to compete against large overseas organisations.
● Large firms will be able to maximise economies of scale, reducing costs and increasing profit further.
● but, firms may not always choose to profit max cause of X-inefficiencies, sales or revenue maximising, profit satisficing or contestability leading to limit pricing.
- In the long run, the lack of competition may mean that firms become complacent and so they may not make maximum profits.
impact of natural monopoly on employees:
● Monopolists produce at lower outputs, so will employ fewer workers.
● but, the inefficiency of the monopoly mean employees receive higher wages, directors and senior managers.
- Profit satisficing or sales/revenue
maximising mean output higher so more employees employed.
