Monopoly Flashcards
What is market power?
Ability to change/influence price
What constitutes a price maker?
- They make their own price
- D is very inelastic, sometimes perfectly inelastic
- P is not constant, if you want to sell more you lower the price
- P > MR
- P > MC
How do you know when it is inefficient?
P > MC
What are the characteristics of monopolies?
- Price maker
- No substitutes
- Graphs of firm and industry are the same
What are the sources of monopoly?
- Governments
- One company owns all the raw materials
- Natural monopoly
- Brand loyalty
- Anti competitive behaviour
How can the government be a source of monopoly?
They give out patents to incentivise. Or government grants the right to produce to a single firm, like a national postal service.
What assumptions can you make about monopoly?
- There is only one firm producing the product so the firm is the industry
- Barriers to entry exist, thus maintaining the monopoly
- The monopoly may be able to make abnormal profits in the long run
How do natural monopolies occur?
Firms gain average cost advantages as their size increases: economies of scale. Firms entering the industry will have start up costs and will not have the economies of scale, thus their prices cannot compete with the monopolist.
How does brand loyalty create monopoly?
The consumers thing of the product as the brand, such as Hoover or to some extent iphone. Iphone can charge high prices because they have high brand loyalty and thus low elasticity of demand.
What is anti competitive behaviour?
A monopolist can try and stop competitors from entering by adopting restrictive practices. For example, an established monopoly can start a “price war” if another firm enters the industry. This means they are able to lower their prices to a loss-making level and be able to sustain it for a certain period of time in order to drive out competition. The knowledge that big monopolies are capable of this is a barrier to entry alone.
Is it true that monopolies can sell however much they like at whatever price?
No, in order to sell more they too must lower their price.
Will the monopolist always earn abnormal profits?
Np, if the monopolist produces something for which there is low demand, then they will not earn abnormal profits.
Is there efficiency in monopoly?
Most of the time, no. Because Q* is not efficient.
Advantages of monopoly when compared with PC
If the monopoly has significant IRS they can actually produce a higher quantity at a lower price that where PC produces (D = S).
Also there is more investment in research and develop
Disadvantages of monopoly when compared with PC
If there are not significant economies of scale, monopoly could charge a higher price than PC.
High profits of monopolies can be considered unfair.
Also they are inefficient
