Monopoly

Question 1

What is a Monopoly?

Answer 1

There is only one firm in the market

Question 2

What are 4 assumptions for a monopoly?

Answer 2

1. Vey high barriers to entry
2. Pure monopoly — only one firm
3. Price Maker — the monopoly has control over the price => can set the price
4. Unique products — no close substitutes e.g there are no substitutes for Bristol Water

Question 3

Where is the Monopoly’s price set on a diagram?

Answer 3

Profit maximizing price (MC=MR)

Question 4

Is the Monopoly statically/dynamically efficient ?

Answer 4

1. Productive efficiency — NO, (not at min AC)
2. Allocative efficiency — NO, (P>MC)
3. Technical efficiency — NO, high SNP => waste of resources
4. Dynamic efficiency — YES, they can reinvest SNP

Question 5

What is a natural monopoly?

Answer 5

A natural monopoly is when it’s naturally most efficient if only one firm is in the market

Question 6

What is price discrimination?

Answer 6

When a firm charges different groups of consumers different prices for the same good

Question 7

3 conditions of price discrimination

Answer 7

1. Monopoly power
2. Limit reselling
3. Different PED - the firm must have information about consumers’ elasticities, it must identify which consumers have elastic and inelastic demand

Question 8

What are 4 barriers that prevent other firms from entering the market

Answer 8

1. Legal barriers — such as patents and copyrights. It stops new firms using the ideas of an INCUMBENT firm
2. Sunk cost — these costs cannot be recovered, therefore they DETER new firms from entering because they know that the cost of failure is high
3. Economies of scale — large firms can use internal economies of scale to reduce LRAC e.g Intel has 87% of a computer chip market => it can use technical economies to invest in specialist machinery to replace labour and reduce costs and price. Whereas a small firm would afford machinery to reduce their costs and they wouldn’t be able to compete at such low prices
4. Brand loyalty — 1) promotion of the brand through advertising 2) increase the quality of goods and services

Question 9

What are 2 reasons for a natural monopoly?

Answer 9

1. High sunk costs — its inefficient for many firms to spend such large amount of money e.g on railway tracks, water pipes, driver training etc. => TFL has 100% of the market share
2. Huge internal economies of scale — for example, TFL can use PURCHASING economies to buy fuel in bulk in order to power their buses at lower costs or TECHNICAL economies to invest in new specialist machinery like self-service ticket stations to replace labour and reduce wage costs

Furthermore, to fully exploit economies of scale, a firm needs to expand its output to reach MES, which it can only do if there is one seller in the market (more efficient).