Monopoly

Question 1

Characteristics of monopoly

Answer 1

• high barriers to entry
• price maker
• market power
• more than 25% market share
• asymmetric information

Question 2

Influences of monopoly power

Answer 2

• barriers to entry
• economies of scale
• Limit pricing
• Sunk costs
• Brand loyalty
• number of competitors
• advertising

Question 3

profit maximisation point and why

Answer 3

MC = MR
- in order to promote dynamic efficiency and innovation
- may want to profit satisfice - money to stakeholders

Question 4

Productive efficiency point

Answer 4

Lowest point of ATC

Question 5

Sales maximisation point
Why it’s used

Answer 5

AR = ATC
- In the short term, firms may use this strategy to clear stock during a sale
- Without making a loss

Question 6

Allocative efficiency point

Answer 6

MC = AR
Natural monopoly

Question 7

Revenue maximising and why

Answer 7

MR = 0
- may chose to revenue maximise to compete in a contestable market, lower prices
- may choose due to principal agent problem - higher salaries for owners

Question 8

Advantages of monopoly

Answer 8

• dynamic efficiency, lower costs as a result
• natural monopoly, more efficient for one firm to provide
• can generate export revenue
• economies of scale

Question 9

Disadvantages of a monopoly

Answer 9

• higher prices and profits, misallocation of resources
• consumer exploitation
• monopolies have no incentive to be efficient so high production costs
• less choice

Question 10

Conditions for price discrimination

Answer 10

• market segmentation
• no arbitrage
• must have the ability to charge different prices

Question 11

Costs and benefits of price discrimination

Answer 11

Benefits:
- Producers: more consumer surplus
- Consumers: consumers in the less elastic group benefit from lower prices

Costs:
Consumers: more elastic group pay higher prices.

Question 12

Natural monopoly

Answer 12

A single firm that produces an entire markets worth of output at a lower cost than multiple firms would. Would not makes sense for more than one to exist
e.g. Railroads, telecommunications, airports

Question 13

Types of anti competitive behaviour

Answer 13

• collusion: when two or more parties act together to influence production
• horizontal collusion: an agree meant between firms at the same stage of the production process
• predatory pricing: setting an artificially low price for a product in order to drive away competition. Illegal in the UK and EU authorities
• tacit collusion: when firms cooperate but not formally.

Question 14

Sunk Costs

Answer 14

An expense that cannot be recovered
- e.g. research and development, advertising….