Monopoly

Question 1

What is a working monopoly?

Answer 1

A working monopoly is any firm with greater than 25% of total sales

Question 2

What is an oligopoly?

Answer 2

An oligopoly is characterised by the existence of a few dominant firms, each has market power and which seeks to protect and improve its position over time

Question 3

What is a duopoly

Answer 3

Two firms take the majority of demand

Question 4

How can a monopoly naturally occur?

Answer 4

Monopoly power can come from the successful organic (internal) growth of a business or through mergers and acquisitions (also known as the integration of firms)

Question 5

What is horizontal integration?

Answer 5

This is where two firms join at the same stage of
The production in one industry
For example two car manufactures may decide to merge or a leading bank successfully takes-over another bank

Question 6

What is vertical integration?

Answer 6

This is where a firm integrates with different stages of production
For example by buying its supplier or controlling the main retail outlets

Question 7

What is forward vertical integration?

Answer 7

Forward vertical integration occurs when a business merges with another business further forward in the supply chain

Question 8

What is backward vertical integration?

Answer 8

Backward vertical integration occurs when a firm merges with another business at a previous stage of the supply chain

Question 9

Give an example of backward vertical integration

Answer 9

The oil and gas industry

Question 10

Give an example of forward vertical integration

Answer 10

Brewers own chains of pubs

Question 11

Give an example of lateral integration

Answer 11

Major software companies buying games developers

Question 12

What are barriers to entry designed to do?

Answer 12

To block rival businesses from entering a market profitably

Question 13

What happens when barriers to entry are successful?

Answer 13

They protect the power of existing firms
Maintain high profits
Increase producer surplus
Makes the market less contest able

Question 14

What are barriers to entry like in competitive markets?

Answer 14

Low so new firms can come and go fairly easily depending on the expected rate of profit

Question 15

What is the main case against monopolies?

Answer 15

It makes higher profits at the expense of a loss of allocative efficiency
The monopolist will seek to extract a price from consumers above the cost of resources used in making the product
Higher prices means that the consumers needs and wants are not being satisfied as the product is being underconsumption
Higher prices cause a loss of consumer surplus and welfare and will disproportionately affect lower income families

Question 16

What are the benefits of monopoly power?

Answer 16

Research and development - profits can be used to fund innovation with important spillover benefits leading to dynamic efficiency
Economies of scale - monopoly producers may achieve economies of scale leading to lower average costs
International competition - a firm may enjoy domestic monopoly power, but still face competition from overseas
Regulation - monopoly producers may be subject to price regulation which limits their profitability

Question 17

What is a pure monopolist?

Answer 17

A pure monopolist is a single seller
It is rare for a firm to have a pure monopoly - except when the industry is state-owned and has a legally protected monopoly