Monopoly

Question 1

What are the 4 principle models of market structure?

Answer 1

perfect competition
monopoly
oligopoly
monopolistic competition

Question 2

What is a monopolist?

Answer 2

-a firm that is the only producer of a good
-no close substitutes

Question 3

Define monopoly

Answer 3

an industry controlled by a monopolist

Question 4

What is market power?

Answer 4

the ability of a firm to raise prices
-can choose price as well as quantity

Question 5

What does a monopolist do?

Answer 5

can reduce the quantity supplied and moves up the demand curve, raising the price
- will be done to increase the profits

Question 6

If a monopolist makes profits why don’t other firms enter the market and drive prices and profits down?

Answer 6

because then it will be a perfectly competitive market

Question 7

What prevents others from going into the same business? (crucial for a monopoly to exist)

Answer 7

barrier to entry

Question 8

What are the 5 barriers to entry?

Answer 8

-control of a scarce resource or input
-technological superiority
-increasing returns to scale
-network externalities
-government-made barriers/ legislations

Question 9

Describe barrier #1

Answer 9

a monopolist that controls a crucial resource or input can prevent other firms from entering its market

Question 10

Describe barrier #2

Answer 10

a firm that maintains a constant technological advantage over potential competitors can establish itself as a monopolist
- not a barrier to entry over the long term

Question 11

Describe barrier #3

Answer 11

when average total cost falls as output increases, firms tend to grow larger
- the source of increasing returns to scale is large fixed costs
- larger companies are profitable and drive out smaller ones
- increasing returns to scale can give rise to and sustain monopoly

• a given quantity of output is produced more cheaply by one large firm that by two or more smaller firms

Question 12

Define a natural monopoly

Answer 12

a monopoly created and sustained by increasing returns to scale
- ie water, natural gas, power generation, optic cable

Question 13

Define network externality
Describe barrier #4

Answer 13

the value of a good or service to an individual increases as more individuals use the same good or service
- the firm with the largest network of customers may become a monopolist
ie eBay, amazon

Question 14

Describe barrier #5

Answer 14

• a patent gives an inventor a temporary monopoly in the use or scale of an invention
• a copyright gives the creator of a literary or artistic work she rights to profit from that work
• the justification for patents and copyrights is a matter of incentives: the law allows a monopoly to exist temporarily by granting property rights that encourage invention and creation
• or government can be a monopolist