Monopoly 3.4.5 Flashcards
Pure Monopoly
Where there is one firm in a market
Legal Monopoly
Where a firm has over 25% market share
4 Monopoly Characteristics
- 1 firm in the market
- Profit maximisers
- High barriers to entry
- Price Makers
5 Monopoly barriers to entry
Legal Barriers
Sunk costs
Economies of scale
Brand loyalty
Anti Competitive Practices
What are legal barriers
Patents, trademarks, copyrights
What are sunk costs
Costs that cant be recovered
What are anti competitive practices
Anything a firm does to reduce or restrict competition
How is vertical integration an anti competitive practice
Allows firms to control scarce resources -> Refuse firms to use them -> stopping them from entering
State the 4 types of efficiency’s and whether monopolies are those types of efficient and why
Productively inefficient - MC ≠ AC
Allocatively inefficient - MC ≠ AR - Welfare isnt maximised
X Inefficient - Producing above ATC
Dynamic efficiency - Possibly as SNP can be reinvested into R&D
Natural Monopolies
Naturally most efficient when 1 firm is in the market
Why do natural monopolies exist
High sunk costs
Huge internal economies of scale
Why does marginal cost MC decrease then increase
As output increase more workers are hired who specialise increasing productivity and decreasing marginal cost, then MC increases as DMR will decrease productivity
Price discrimination
When a firm charges different prices for the same G+S based on PED
3 conditions needed to price discriminate
Market power
Information
Limit reselling
Disadvantages of monopolies for consumers
Producing at P Max results in a loss of consumer surplus due to higher prices
Advantages of monopolies for consumers
Monopolies produce cheap, high quality goods as they reinvest SNP and access economies of scale
Advantages of being a monopoly
Monopolies profit max allowing them to exploit consumer welfare to gain SNP
How does dynamic efficiency affect the market position of a monopoly
Enables firms to lower prices and keep new firms from entering the market, reinvesting SNP leads to strengthening of a firms monopoly position
Disadvantages of monopolies for firms
Monopolies can drive competitors out of the market which can lead to complacency, increase in x-inefficiency, firms costs may rise, lead to higher prices and the loss of the firm’s monopoly position.
Disadvantages to suppliers for monopolies
Monopolies are the only buyers of goods, and are able to set low prices, suppliers suffer losses and are driven out the market
Monopoly Eval points
Heavily regulated
Dynamic efficiency may not occur
Proit max not main obj for monopolies
Level of EOS
Contestability
Price discrimination cons
Allocatively inefficient
SNP used to drive out elastic competitors
Worsens income inequality
Price discrimination pros
Dynamic efficiency
Elastic gain consumer surplus
Economies of scale
