Monopoly (3.4.5) Flashcards
What is a monopoly?
Market structure in which there is a single seller
What is a pure monopoly?
market structure in which a single firm is the only provider of a particular good or service. This firm dominates the entire supply of the product, and there are no close substitutes available. Monopolist has complete control over the market and can set prices without competition.
What’s the closest real-life example of a pure monopoly?
Google who have 88% of the market
What are the characteristics of a monopoly market structure?
-Single seller
-No substitute products
-Firm has complete market power and is able to set prices and control output
-High barriers to entry exist (Monopoly firm can buy any competition)
-CMA says any firm with 25%+ market share
Why does the CMA try to prevent a Monopoly (25%+ market share) in most industries?
Monopolies can lead to market failures and harm consumers, competition, and the economy as a whole. Can lead to higher prices, reduced choice, inefficiency, reduced innovation etcc..
If a firm is a Monopoly are they a price maker or price taker?
Price maker or setter as they are able to manipulate prices in order to change demand
What does the demand curve look like for a monopolist?
Slide 29
What is Price Discrimination?
Occurs when a firm charges a different price for the same good/service in order to maximise its revenue. The goal is to maximize profits by capturing more consumer surplus (the difference between what consumers are willing to pay and what they actually pay).
What is third degree Price Discrimination?
Firm charges different prices to different groups of consumers based on identifiable characteristics, such as age, location, or time of purchase, among others. The firm divides the market into distinct segments, each with a different price elasticity of demand, and charges a price tailored to each segment’s willingness or ability to pay.
What’s a real-life example of third degree Price Discrimination?
Rail fares are priced differently depending on the time of travel
What are markets often sub-divided into for price discrimination?
-time
-age
-income
-geographic location
e.g. Some airline ticket portals charge higher prices to customers using an Apple computer as they are likely to have higher income
What conditions must be met for a Third Degree Price Discrimination to occur?
-Firm must have ability to change prices
-Some consumers must be willing to pay more and the firm must be able to identify these different consumer groups
-Must be able to prevent consumers from buying in low-price elastic sub market and reselling in the higher price inelastic market
What does Third Degree Price Discrimination look like on graphs?
Slide 30
If the third degree price discrimination represents market for travel what would the inelastic and elastic demand be?
Where price inelastic demand is ‘peak’ hour demand and price elastic demand is any time of the day ‘off-peak’
What are the costs and benefits of Third degree price discrimination consumers?
-Some customers will lose out by paying higher prices, lowering consumer surplus
-Some will benefit as will take advantage of lower prices, increasing consumer surplus
-Higher price decreases QD and can increase consumer utility (e.g less crowded on a train)
What are the costs and benefits of Third degree price discrimination producers?
-TR increases leading to higher profits
-Increase in producer surplus at expense of consumer surplus
-Setting up price discrimination can increase average costs
What is consumer and producer surplus?
Consumer Surplus=Difference between amount consumer is willing and able to pau for a product and the price they have actually paid
Producer Surplus=Difference between amount producer is willing to sell a product and the price they actually do
What are the advantages and disadvantages of monopoly power for firms?
Advantages:
- Supernormal investment from product innovation
-Market power increases global competitiveness
-Economies of scale can increase
-Producer Surplus increases
-TR increased
Disadvantages:
-Due to lack of competition reduced incentive to be efficient
-Cross subsidisation can create inefficiencies
-Misallocation of resources
-Innovation sometimes lacks competitiveness
What is Cross subsidisation? + e.g.
Using the profit generated by one product to lower the price of another
e.g. supermarkets may cross subsidise petrol sales from profits gained selling alcohol
What are the advantages and disadvantages of monopoly power for employees?
Advantages:
-Supernormal Profits= higher wages and greater job security
Disadvantages:
-One supplier in industry limits opportunity to change employers
What are the advantages and disadvantages of monopoly power for consumers?
Advantages:
-Product innovation= better quality product
-Cross subsidisation can lower prices
-Prices may fall if firms pass on cost savings in form of lower product prices
Disadvantages:
-Lack of competition likely to lead to higher prices and no substitutes
-Lack of competition may result in no product innovation so bad quality
-Worse customer service may be experienced
-Increase prices on some products for cross subsidisation
-Consumer surplus decrease
What are the advantages and disadvantages of monopoly power for suppliers?
Advantages:
-Increased sales volume as able to distribute nationally or internationally
Disadvantages:
-Less competition for their products and monopoly has power to dictate prices they pay
-Price may not be profitable in long run
What is a natural monopoly?
Occurs when the optimum number of firms in the industry is one
What industries do natural monopolies usually occur in?
Usually occur in utility industries and are regulated by the Government to ensure that consumers aren’t charged higher monopoly prices. This is often in the form of a max price or price cap
What are some real-life examples of natural monopolies?
-National Grid
-Royal Mail
-National Rail
What type of efficiency is a monopoly?
They are productively and allocatively inefficient but are dynamically efficient
