Monopoly

Question 1

What is a pure monopolist

Answer 1

A single supplier that dominates the entire market

Question 2

What is a working monopoly

Answer 2

Any firm with greater than 25% of the industries total sales

Question 3

What is a dominant firm

Answer 3

A firm that has at least 40% market share

Question 4

To who is price setting power available to

Answer 4

Any business with a downward-sloping demand curve

Question 5

What profits do a monopoly make

Answer 5

Supernormal profits

Question 6

Is a monopoly a price maker or taker

Answer 6

Maker

Question 7

AR and MR curves for a monopoly

Answer 7

Downward sloping - they price setting / making powers

Question 8

Can monopolies set prices or quantities

Answer 8

One or the other but not both

Question 9

Monopoly assumptions

Answer 9

Potential for price discrimination
Imperfect information
Profit maximisation

Question 10

Why do firms with market power often not profit maximise

Answer 10

One of their aims is to maintain their market share

Question 11

What is an alternative objective for a monopoly

Answer 11

Revenue maximisation

Question 12

What is a natural monopoly

Answer 12

When there cannot be more than one efficient provider of a good

Question 13

What is a natural monopoly characterised by

Answer 13

Increasing returns to scale at all levels of output

Question 14

What happens as a result of a natural monopoly having increasing returns to scale at all levels of output

Answer 14

LRAC will drift lower as production expands - LRAC is falling because LRMC is below LRAC

Question 15

Analysis of profit maximisation for a natural monopoly: costs

Answer 15

High fixed costs involved in supplying that the LRAC curve may fall continuously as output increases in the LR

Question 16

Analysis of profit maximisation for a natural monopoly: profit maximising output

Answer 16

Likely to be highly allocatively inefficient since price is significantly above MC and output is restricted

Question 17

Analysis of profit maximisation for a natural monopoly: if it is state-owned

Answer 17

Prices are capped at MC in order to increase supply / affordability, losses may be made then

Question 18

Economic case against monopoly

Answer 18

• higher prices
• lack of production efficiency
• lack of economies of scale
• protected markets = less dynamic efficiency

Question 19

What are the problems with a monopoly getting too big

Answer 19

Diseconomies of scale = rising LR AC

Question 20

When does X-inefficiency occur

Answer 20

When a business produced at a higher unit cost than if there was genuine actual competition in a market

Question 21

Advantages from a monopoly

Answer 21

• profits to fund investment and research
• natural monopoly - economies of scale
• domestic monopoly faces global competition
• they can be regulated
• price discrimination can help some consumers

Question 22

Policies to regulate monopoly power

Answer 22

Tax on profits
Liberalisation of markets
Price capping policies
Nationalisation

Question 23

Why would we place a tax on monopoly profits

Answer 23

Tax supernormal profits

Question 24

Why would we liberalise markets

Answer 24

Break up monopolies - allow smaller businesses to enter and increased contestability

Question 25

Why would we introduce price capping policies

Answer 25

Encourages cost efficiency and increases consumer surplus

Question 26

Why would we encourage nationalisation

Answer 26

Take some monopoly utilities back into public ownership

Question 27

Evaluation on taxing monopoly profits

Answer 27

Risk of tax avoidance / loss of capital investment spending

Question 28

Evaluation on the liberalisation of markets

Answer 28

Smaller businesses may struggle to scale up and compete

Question 29

Evaluation on introducing price capping policies

Answer 29

Monopolists may find revenues in other ways

Question 30

Evaluation of nationalisation

Answer 30

Possible loss of productive efficiency

Question 31

When does liberalisation happen

Answer 31

When policies seek to lower the entry barriers into a market with the result that new businesses enter and make an industry more contestable

Question 32

What can regulation act as

Answer 32

A form of surrogate competition - attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets

Question 33

Problems with regulation

Answer 33

Not always effective and can give rise to regulatory failure