Monopoly Flashcards
What are the features of a monopoly?
- only one firm
- complete barriers prevent the entry and exits of firms
- firm is a price maker
What are barriers to entry?
Artificial barriers
- fist mover advantage
- predatory pricing
- legislation
- product differentiation
- high MES
Legal entry barriers
- market license
- patent protection
- state awarded franchises
- import controls
Where does Q occur in a monopoly?
MC=MR
Why are monopoly’s not productively efficient?
At Q, AC is not at its lowest
Why does a firm not have incentive to be productively efficient?
It decreases their supernormal profit
Why are firms not allocatively efficient?
Q doesn’t = P=MC
Monopoly’s can restrict supple and raise prices so they are allocatively inefficient
Why does dynamic efficiency not appeal to pure monopoly’s?
Gain less as there would be more spent on R&D
Where does revenue maximisation occur in a monopoly?
MR=0
What is x - inefficiency?
Organisational slack, occurs when a firm leads to the incentive to control costs. This causes average costs of production to be higher than necessary
Why does x inefficiency occur?
- bonuses
- expenses
Why can’t x inefficiency occur in a perfect comp market?
Leads to subnormal profit
Why is Q where it is in a monopoly?
We assume all firms are short run profit maximisers ( supernormal profit is at its largest)
Where are sales maximised on a monopoly diagram?
AC=AR
Why would a firm never produce above sales max level?
AC is higher than AR therefore subnormal profit is formed
What is dead weight loss?
Loss of welfare arising from a market failure/ misallocation of resources I.e. externalities or monopolies
What is Q competition?
If there were more firms in the market output would be greater, prices would be lower and there would be a greater welfare
What is a natural monopoly?
Only room for one firm in a market to fully exploit the economies of scale that are available
- in fact the firm never fully exploits economies of scale
- these result from nationalisation
What is nationalisation?
Process of taking private sector firms back into the public sector/ was always public ally used
Why does consumer surplus decrease?
Decreases due to high price
Why does producer surplus increase?
Due to high price
Why is Q supernormal profit not a good choice for a state owned good?
Supernormal profit would be silly to do on a necessity
What is regulatory capture?
A process by which regulatory agencies become dominated by the interests of those they were originally charged to regulate
disadvantages of a monopoly to the firm?
- Due to a lack of competition, there is a reduced incentive to be efficient
- Monopolies lead to a misallocation of resources as P > MC. The price is above the opportunity cost of providing the goods
- Due to a lack of competition, innovation sometimes lacks effectiveness
advantages of a monopoly to the firm?
- Supernormal profits generate money for continued investment in technology and product innovation
- Market power enables the firm to increase its global competitiveness
- Economies of scale can increase, thereby lowering the average cost
- Producer surplus increases
- Price discrimination can increase revenue
disadvantages of a monopoly to consumers?
- A lack of competition is likely to result in higher prices as no substitute goods are available
- A lack of competition may result in no product innovation & worse product quality over time
- May experience worse customer service as the incentive to improve it is limited
- decrease in consumer surplus
advantages of a monopoly to consumers?
- Product innovation due to the firm’s supernormal profits may result in a better-quality product
advantages of a monopoly to suppliers?
- Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally
disadvantages of a monopoly to suppliers?
- There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers (monopsony power)
- This price may not be profitable in the long run
Why are monopolies not always undesirable?
- price discrimination to make prices equitable
- EOS
- internationally competitive
- opportunity for dynamic efficiency
- make sense in case of natural monopoly
