Monopoly

Question 1

What market share does google have

Answer 1

88%

Question 2

Pure monopoly

Answer 2

A sole seller of a product or service in a market, doesn’t exist in reality

Question 3

What is the market share requirement for a monopoly

Answer 3

25%

Question 4

Characteristics of a monopoly

Answer 4

• High barriers to entry
• product differentiation
• Few competitors
• Price maker
• profit maximise

Question 5

Why the demand curve for a monopoly downwards sloping and not completely inelastic

Answer 5

People can still choose to buy the good or not so price still changes with demand

Question 6

Can Monopolies make long run supernormal profits and a loss

Answer 6

Yes because there are high barriers to entry so supernormal profit isn’t competed away

Question 7

Third degree price discrimination

Answer 7

Firm charges different prices for the same product to different segments of the market

Question 8

Examples of third degree price discrimination

Answer 8

• Times of the day
• Age
• Place
• Incomes

Question 9

What are the conditions for third degree price discrimination to work

Answer 9

• 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)

Question 10

First degree price discrimination

Answer 10

Charging customers the maximum they would be willing to pay which turns all consumer surplus into revenue

Question 11

Second degree price discrimination

Answer 11

Lower prices charged to people buying large quantities, usually in wholesale markets, reduces some consumer surplus to those not buying large quantities

Question 12

Why does the price discrimination diagram assume Ac and MC are a straight line

Answer 12

For simplicity spumes there are no economies of scale

Question 13

In price discrimination who will be charged the higher price

Answer 13

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.

Question 14

What is the point in showing all three graphs in price discrimination

Answer 14

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

Question 15

Benefits of third degree price discrimination

Answer 15

• 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

Question 16

Costs of third degree price discrimination

Answer 16

• 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

Question 17

Natural Monopoly

Answer 17

In industries with huge fixed infrastructural costs so huge barriers to entry, and large economies of scale can lead to natural monopolies forming

Question 18

examples of industries close to natural monopolies

Answer 18

National rail, Royal Mail

Question 19

What are AC and MC like in a natural monopoly

Answer 19

They just continue to fall because of the huge continuous economies of scale in the industry

Question 20

Why do natural monopolies cause one firm to be in the industry

Answer 20

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

Question 21

Why do Natural Monopolies restrict output

Answer 21

So they can produce at MR and maximise profit

Question 22

Why are governments reluctant to break up natural monopolies

Answer 22

Can reduce efficiency

Question 23

What do governments instead do to natural monopolies

Answer 23

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

Question 24

Benefits of a monopoly to the firm

Answer 24

• 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

Question 25

Costs of a monopoly to the firm

Answer 25

• 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

Question 26

Benefits of monopoly to the consumer

Answer 26

• 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

Question 27

costs of a monopoly to the consumer

Answer 27

• 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

Question 28

Effects of a monopoly on employees

Answer 28

• 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

Question 29

How can monopolies effect suppliers

Answer 29

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

Question 30

deadweight loss

Answer 30

cost to society created by market inefficiency so a monopoly creates a deadweight loss by reducing output and increasing price

Question 31

Williamson trade off

Answer 31

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

Question 32

cross subsidisation

Answer 32

Funding one product with the profits of another, done in large firms

Question 33

What did Schumpter argue about monopolies

Answer 33

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

Question 34

Why are there so few permanent monopolies

Answer 34

supernormal profits give incentives for other firms to try and break down the monopoly through creative destruction

Question 35

What is the long run short run view of monopolies

Answer 35

Good in the short run as it provides incentive to invest in innovation, but in the long run will become complacent and inefficient.

Question 36

Give an example of how the effects of the monopoly may be dependent on the industry

Answer 36

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