Monopoly Flashcards
Working monopoly
25%
Dominant monopoly
40%
Pure monopoly
100%
Natural monopoly
When completion is unfeasible
Pure monopolists will
Profit maximise
Allocative efficiency
MC=AR
Productive efficiency
MC=AC
Assumptions of pure monopolies (6)
• Ho: Unique products
• No: High BTE
• Per: Imperfect knowledge
• Nor: SNP in LR
• Man: One buyer, many sellers
• Price: Price makers
Economic case against monopoly (4)
Service: DOS
Prices
Efficiency: not AE or PE, limits output
Welfare: less incentive to invest
Advantages of monopolies (5)
• Reinvestment
• Natural monopolies (EOS)
• Easier to compete internationally
• Regulated CMA (proxy competitor: watch dog)
• Price discrimination
Price discrimination
Charging consumers different prices for reasons not associated with costs
Conditions for price discrimination (3)
• Sufficient monopoly power
• ID’ing market segments
• Ability to prevent re sale
Aims of price discrimination (3)
• Increase revenue
• Increase profits
• Use up spare capacity
Types of price discrimination (4)
1st degree: perfect pricing (bartering)
2nd degree: price varying on Q sold
3rd degree: group discrimination
Hurdle model
Hurdle model (4)
• Delay a purchase
• Risk not getting the product
• Discount if the product is 2nd hand
• Discounts may require customers to collect and redeem coupons
Against price discrimination targeting (4)
• Exploitation: majority still paying more than MC
• Extracts consumer surplus turned into higher producer surplus
• Possible use of discrimination as limit pricing tactic/ BTO
• If successful it reinforces the monopoly power of existing firms
Cross subsidising (4)
• Charge high prices at peak times to subsides off-peak times
• Better use of spare capacity: less waste
• Brings in new consumers into market who would have otherwise excluded a ‘normal higher price’
• Use of monopoly profit for research this is a stimulus to innovation/dynamic efficient gains
