Monopoly 3.4.5

Question 1

Pure Monopoly

Answer 1

Where there is one firm in a market

Question 1

Legal Monopoly

Answer 1

Where a firm has over 25% market share

Question 2

4 Monopoly Characteristics

Answer 2

• 1 firm in the market
• Profit maximisers
• High barriers to entry
• Price Makers

Question 3

5 Monopoly barriers to entry

Answer 3

Legal Barriers
Sunk costs
Economies of scale
Brand loyalty
Anti Competitive Practices

Question 4

What are legal barriers

Answer 4

Patents, trademarks, copyrights

Question 5

What are sunk costs

Answer 5

Costs that cant be recovered

Question 6

What are anti competitive practices

Answer 6

Anything a firm does to reduce or restrict competition

Question 7

How is vertical integration an anti competitive practice

Answer 7

Allows firms to control scarce resources -> Refuse firms to use them -> stopping them from entering

Question 8

State the 4 types of efficiency’s and whether monopolies are those types of efficient and why

Answer 8

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

Question 9

Natural Monopolies

Answer 9

Naturally most efficient when 1 firm is in the market

Question 10

Why do natural monopolies exist

Answer 10

High sunk costs
Huge internal economies of scale

Question 11

Why does marginal cost MC decrease then increase

Answer 11

As output increase more workers are hired who specialise increasing productivity and decreasing marginal cost, then MC increases as DMR will decrease productivity

Question 12

Price discrimination

Answer 12

When a firm charges different prices for the same G+S based on PED

Question 13

3 conditions needed to price discriminate

Answer 13

Market power
Information
Limit reselling

Question 14

Disadvantages of monopolies for consumers

Answer 14

Producing at P Max results in a loss of consumer surplus due to higher prices

Question 15

Advantages of monopolies for consumers

Answer 15

Monopolies produce cheap, high quality goods as they reinvest SNP and access economies of scale

Question 16

Advantages of being a monopoly

Answer 16

Monopolies profit max allowing them to exploit consumer welfare to gain SNP

Question 17

How does dynamic efficiency affect the market position of a monopoly

Answer 17

Enables firms to lower prices and keep new firms from entering the market, reinvesting SNP leads to strengthening of a firms monopoly position

Question 18

Disadvantages of monopolies for firms

Answer 18

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.

Question 19

Disadvantages to suppliers for monopolies

Answer 19

Monopolies are the only buyers of goods, and are able to set low prices, suppliers suffer losses and are driven out the market

Question 20

Monopoly Eval points

Answer 20

Heavily regulated
Dynamic efficiency may not occur
Proit max not main obj for monopolies
Level of EOS
Contestability

Question 21

Price discrimination cons

Answer 21

Allocatively inefficient
SNP used to drive out elastic competitors
Worsens income inequality

Question 22

Price discrimination pros

Answer 22

Dynamic efficiency
Elastic gain consumer surplus
Economies of scale