Monopoly Flashcards
definition of monopoly
When there is only 1 dominant firm in the market
characteristic of monopoly
- only 1 firm (100% market share)
- Profit maximisers
- high barriers to entry
What is a pure monopoly
A firm that dominates the entire market and has 100% of the market share.
What is a working/legal monopoly
A firm with a greater market share of 25%
What is a dominant monopoly
A firm with a greater market share of 40%
Examples of high barrier entry
Legal patent, price limiting, copyright, economies of scale, sunk cost, brand loyalty
Define legal barrier
Laws and regulations that make it difficult for new firms to compete against existing firms
Define sunk cost
Cost that cannot be recovered.
Define natural monopoly
most efficient when there is only 1 firm
Where a firm can supply the entire market at a lower LRAC compared to multiple provider
Monopoly AD n DA for consumers
- lower consumer surplus
- fewer choices
- higher consumer surplus (economies of scale)
- higher quality due to dynamic efficiency
Monopoly AD n DA for firms
- More competitive in LR due to dynamic efficiency
- More returns for shareholders
- regulation risk (lead to high penalties and compliance cost to the CMA)
- lack of competitiveness in long run due to lack of competitive drive, hinder innovation
Monopoly AD n DA for suppliers
- predictable and simplified sales process
- lower profit due to dependency on monopoly and its bargaining power
Monopoly AD n DA for employees
- more job stability (lack of competition-> stable profit)
- better and more benefits (to retain workers needing skilled workforce - to remain competitive)
- limited career mobility (due to lack of substitute firms available to switch)
- Lower wage (assuming if the firm has high monopsony power)
characteristic of natural monopoly
- high barriers to entry and exit (sunk cost)
- high fixed cost
- low marginal cost (leading to high economies of scale)
- considered inefficient to duplicate infrastructure
argument for natural monopoly
why is it better to only have one
Because duplicates of the same infrastructure (high sunk cost) is considered wasting resources eg. water suppliers.
Considered more efficient for only 1 firm to provide the good or service in the industry.
What is price discrimination
Occurs when different groups of consumers are charged at a different price for the same good or service
What factors are used to discriminate consumers
Age, time, location
What are the 2 arguments against price discrimination
- Exploitation of the consumer by extracting consumer surplus for producer surplus (consumers)
- Reinforces monopoly power of existing firms by allowing price limiting tactic to rival firms (producers)
What is price limiting
Setting a low price to discourage new firms from entering the market
What are the 3 arguments support in price discrimination
- Allows cross subsidy that brings social benefits (consumers)
- making use of spare capacity (producers)
- More supernormal profit for dynamic efficiency (producers)
What are the conditions for price discrimination
- Must have monopoly power to be a price maker
- Ability to prevent re-sell
- Ability to identify different elasticity on different groups of consumers
AD n DA of price discrimination for consumers
- lower price from cross subsidisation
- new consumers to the market from lowered price
1, decreases consumer surplus for producer surplus
AD n DA of price discrimination for producers
- more dynamic efficiency (supernormal profit)
- making use of spare capacity
- high administrative cost from price discrimination (requires division to collect data and enforce price discrimination to different consumer groups without black market)
- may not actually lead to dynamic efficiency due to loses from cross subsidisation
How does the government intervene in monopoly?
methods and their evaluation
- Price regulation
May reduce quality - Profit regulation
Reduces dynamic efficiency - Quality standards
Increases cost, increase price - Performance targets
Reduces quality - Demerging
Reduces economics of scale - Nationalisation
Reduces profit incentive, reduces efficiency, quality and competitiveness
