Monopoly Flashcards
What is a pure monopolist
A single supplier that dominates the entire market
What is a working monopoly
Any firm with greater than 25% of the industries total sales
What is a dominant firm
A firm that has at least 40% market share
To who is price setting power available to
Any business with a downward-sloping demand curve
What profits do a monopoly make
Supernormal profits
Is a monopoly a price maker or taker
Maker
AR and MR curves for a monopoly
Downward sloping - they price setting / making powers
Can monopolies set prices or quantities
One or the other but not both
Monopoly assumptions
Potential for price discrimination
Imperfect information
Profit maximisation
Why do firms with market power often not profit maximise
One of their aims is to maintain their market share
What is an alternative objective for a monopoly
Revenue maximisation
What is a natural monopoly
When there cannot be more than one efficient provider of a good
What is a natural monopoly characterised by
Increasing returns to scale at all levels of output
What happens as a result of a natural monopoly having increasing returns to scale at all levels of output
LRAC will drift lower as production expands - LRAC is falling because LRMC is below LRAC
Analysis of profit maximisation for a natural monopoly: costs
High fixed costs involved in supplying that the LRAC curve may fall continuously as output increases in the LR
Analysis of profit maximisation for a natural monopoly: profit maximising output
Likely to be highly allocatively inefficient since price is significantly above MC and output is restricted
Analysis of profit maximisation for a natural monopoly: if it is state-owned
Prices are capped at MC in order to increase supply / affordability, losses may be made then
Economic case against monopoly
- higher prices
- lack of production efficiency
- lack of economies of scale
- protected markets = less dynamic efficiency
What are the problems with a monopoly getting too big
Diseconomies of scale = rising LR AC
When does X-inefficiency occur
When a business produced at a higher unit cost than if there was genuine actual competition in a market
Advantages from a monopoly
- 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
Policies to regulate monopoly power
Tax on profits
Liberalisation of markets
Price capping policies
Nationalisation
Why would we place a tax on monopoly profits
Tax supernormal profits
Why would we liberalise markets
Break up monopolies - allow smaller businesses to enter and increased contestability
Why would we introduce price capping policies
Encourages cost efficiency and increases consumer surplus
Why would we encourage nationalisation
Take some monopoly utilities back into public ownership
Evaluation on taxing monopoly profits
Risk of tax avoidance / loss of capital investment spending
Evaluation on the liberalisation of markets
Smaller businesses may struggle to scale up and compete
Evaluation on introducing price capping policies
Monopolists may find revenues in other ways
Evaluation of nationalisation
Possible loss of productive efficiency
When does liberalisation happen
When policies seek to lower the entry barriers into a market with the result that new businesses enter and make an industry more contestable
What can regulation act as
A form of surrogate competition - attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets
Problems with regulation
Not always effective and can give rise to regulatory failure
