Monopoly Flashcards
What market share does google have
88%
Pure monopoly
A sole seller of a product or service in a market, doesn’t exist in reality
What is the market share requirement for a monopoly
25%
Characteristics of a monopoly
- High barriers to entry
- product differentiation
- Few competitors
- Price maker
- profit maximise
Why the demand curve for a monopoly downwards sloping and not completely inelastic
People can still choose to buy the good or not so price still changes with demand
Can Monopolies make long run supernormal profits and a loss
Yes because there are high barriers to entry so supernormal profit isn’t competed away
Third degree price discrimination
Firm charges different prices for the same product to different segments of the market
Examples of third degree price discrimination
- Times of the day
- Age
- Place
- Incomes
What are the conditions for third degree price discrimination to work
- Firm must be able to clearly separate market into groups of buyers
- Different customers must have different elasticities
- Firms must be able to control supply preventing buyers buying in different markets (adults buying child tickets)
First degree price discrimination
Charging customers the maximum they would be willing to pay which turns all consumer surplus into revenue
Second degree price discrimination
Lower prices charged to people buying large quantities, usually in wholesale markets, reduces some consumer surplus to those not buying large quantities
Why does the price discrimination diagram assume Ac and MC are a straight line
For simplicity spumes there are no economies of scale
In price discrimination who will be charged the higher price
The segment of the market that has a more inelastic demand for the product as this will allow the monopoly firm to profit more, people who commute to London for work have more inelastic demand for travel than tourists or shoppers so are charged more.
What is the point in showing all three graphs in price discrimination
By drawing both elastic and inelastic markets, and combined market you can illustrate that the two separate markets generate more profit for the firm than having a combined market
Benefits of third degree price discrimination
- Extra revenue for the firm
- Extra revenue may be reinvested to create more efficient production techniques
- Some consumers will benefit from lower prices
- higher prices are usually charged to those with higher incomes, progressive for inequality
Costs of third degree price discrimination
- Consumers aren’t treated equally
- decline in consumer surplus
- Administrative costs for firms in separating the market
- Profits from discrimination may not be reinvested
- Impefect information means markets may be segmented incorrectly
Natural Monopoly
In industries with huge fixed infrastructural costs so huge barriers to entry, and large economies of scale can lead to natural monopolies forming
examples of industries close to natural monopolies
National rail, Royal Mail
What are AC and MC like in a natural monopoly
They just continue to fall because of the huge continuous economies of scale in the industry
Why do natural monopolies cause one firm to be in the industry
It is more beneficial to the consumer and producers for there to be one firm in the industry as it means only one firm takes on the high fixed costs instead of multiple having the same high fixed costs which would raise the price for the consumer
Why do Natural Monopolies restrict output
So they can produce at MR and maximise profit
Why are governments reluctant to break up natural monopolies
Can reduce efficiency
What do governments instead do to natural monopolies
They will subsidise the natural monopoly so that they increase output and produce at the allocatively efficient point where AR=MC so that social welfare is maximised
Benefits of a monopoly to the firm
- Potential for huge profits for shareholders
- supernormal profit allows for lots of reinvestment into innovation, and can build up reserves for short term difficulties
- Can compete in overseas markets
- Maximise economies of scale
- security results in dynamic efficiency
Costs of a monopoly to the firm
- Lack of competition may make firms complacent and statically inefficient
- Firms may not always profit maximise
- welfare loss to firm as they lose potential extra customers and revenue from high prices
- No need for innovation due to security in the industry
Benefits of monopoly to the consumer
- natural monopolies create large consumer surplus
- Increased range of goods and services
- Economies of scale allows costs and prices to be kept lower for customers
- price discrimination helps those in the cheap market
- IPR can help form limited monopolies that act in consumer interests
costs of a monopoly to the consumer
- consumer choice is restricted
- high prices so low consumer surplus
- poorer quality due to lack of competition
- price discrimination negatively impacts those in expensive market
Effects of a monopoly on employees
- Monopolists limit output so employment will be lower, my be monopsonist labour market
- financial security of monopoly allows a stable environment for employees
- inefficiency in monopolies may mean higher wages
- if firms down profit maximise then output will be higher so employ more
How can monopolies effect suppliers
Monopolies in some cases will be monopsonist as they will be the only one buying the supply of a material for their production so they can exploit suppliers by driving the price down reducing suppliers profits
deadweight loss
cost to society created by market inefficiency so a monopoly creates a deadweight loss by reducing output and increasing price
Williamson trade off
Shows the difference between perfect competition and a monopoly displaying the remaining consumer surplus, the consumer surplus that is changed to supernormal profit and the consumer surplus that is changed to deadweight loss, the AC=MC can be manipulated to show x inefficiency or economies of scale
cross subsidisation
Funding one product with the profits of another, done in large firms
What did Schumpter argue about monopolies
They have retained supernormal profits so they can innovate products and production techniques so that they are more productively efficient, allocatively efficient and dynamically efficient
Why are there so few permanent monopolies
supernormal profits give incentives for other firms to try and break down the monopoly through creative destruction
What is the long run short run view of monopolies
Good in the short run as it provides incentive to invest in innovation, but in the long run will become complacent and inefficient.
Give an example of how the effects of the monopoly may be dependent on the industry
In an industry with large fixed costs like oil, marginal cost and variable costs will be lower which lowers the cost of producing each unit of output so economies of scale are larger
