Monopoly

Question 1

Pure monopoly

Answer 1

A single supplier that dominates the entire market-the market has 100% concentration

Question 2

Working monopoly

Answer 2

Any firm with greater than 25% of the industries total sales

Question 3

Dominant firm

Answer 3

A firm with at least 40% markets share

Question 4

Concentration ratios

Answer 4

A measure of market dominance. The top 3 or 5 firms in a market

Question 5

Key features of a monopoly

Answer 5

-Price making power
-Firms can set prices or quantities but not both
-Downwards sloping AR and MR curve
-Barriers to entry exist to maintain supernormal profit
-Imperfect information
-Profit maximisation is assumed but may be different in an oligopoly with a dominant firm
-Firms that don’t profit maximise aim to maintain their market share

Question 6

Economic case against Monopoly

Answer 6

-Prices are higher than under competitive conditions
-Leads to a loss of allocative efficiency (price>MC)
-Regressive effects on lower income households
-Absence of genuine market conditions may lead to production inefficiencies
-Monopoly may get too big = diseconomies of scale
-Protected markets = may be less drive to innovate
-X-inefficiencies such as advertising spending

Question 7

Deadweight loss of welfare caused by monopoly

Answer 7

Loss of consumer welfare + Loss of producer welfare

Question 8

X-Inefficiency

Answer 8

This means that the average cost of production is higher than on the AC boundary

Question 9

Economic case for monopoly power

Answer 9

-Profits used to fund investment and research
-Natural monopoly leads to economies of scale
-Faces global competition so can be more efficient
-Monopoly firms can be regulated
-Price discrimination may help some consumers