Monopoly Flashcards
What is a monopoly?
A market with a single seller
What is monopoly power?
Monopoly power is the ability to control price and output, therefore monopolies can deviate from profit maximisation
Which PED are monopolies?
Monopolies are inelastic in demand
Are monopolies allocatively efficient, productively efficient, do they have deadweight loss, and are they dynamically efficient?
Allocative efficiency is AR = MC, monopolies are assumed to profit maximise so they are not allocatively efficient
Productive efficiency is AC = MC, again they profit maximise so not productively efficient
Net consumer and producer surplus is maximised at allocative efficiency so monopolies do cause deadweight loss
They do have the supernormal profits for investment to be dynamically efficient but they don’t face any competition so don’t have an incentive to invest
What can the government do about monopoly power?
The government investigated any firm with 25% or more market share. The government can either intervene with regulation or remove barriers to entry to make it more contestable
What is a natural monopoly?
A monopoly caused by technical/ natural barriers to entry. Technical barriers to entry include high MES point, high sunk costs and control over a scarce resource
Why does MES point create natural monopolies?
If the MES point is high this means that the lowest point of the average cost curve is at a high level of output. As demand is finite this means that only a one firm is able to operate in the market as there is only enough demand for one firm
If more than one firm existed then they would have more average costs than if only one firm existed
