Monopoly Flashcards

1
Q

What is a pure monopolist

A

A single supplier that dominates the entire market

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2
Q

What is a working monopoly

A

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

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3
Q

What is a dominant firm

A

A firm that has at least 40% market share

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4
Q

To who is price setting power available to

A

Any business with a downward-sloping demand curve

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5
Q

What profits do a monopoly make

A

Supernormal profits

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6
Q

Is a monopoly a price maker or taker

A

Maker

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7
Q

AR and MR curves for a monopoly

A

Downward sloping - they price setting / making powers

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8
Q

Can monopolies set prices or quantities

A

One or the other but not both

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9
Q

Monopoly assumptions

A

Potential for price discrimination
Imperfect information
Profit maximisation

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10
Q

Why do firms with market power often not profit maximise

A

One of their aims is to maintain their market share

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11
Q

What is an alternative objective for a monopoly

A

Revenue maximisation

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12
Q

What is a natural monopoly

A

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

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13
Q

What is a natural monopoly characterised by

A

Increasing returns to scale at all levels of output

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14
Q

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

A

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

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15
Q

Analysis of profit maximisation for a natural monopoly: costs

A

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

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16
Q

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

A

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

17
Q

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

A

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

18
Q

Economic case against monopoly

A
  • higher prices
  • lack of production efficiency
  • lack of economies of scale
  • protected markets = less dynamic efficiency
19
Q

What are the problems with a monopoly getting too big

A

Diseconomies of scale = rising LR AC

20
Q

When does X-inefficiency occur

A

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

21
Q

Advantages from a monopoly

A
  • 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
22
Q

Policies to regulate monopoly power

A

Tax on profits
Liberalisation of markets
Price capping policies
Nationalisation

23
Q

Why would we place a tax on monopoly profits

A

Tax supernormal profits

24
Q

Why would we liberalise markets

A

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

25
Why would we introduce price capping policies
Encourages cost efficiency and increases consumer surplus
26
Why would we encourage nationalisation
Take some monopoly utilities back into public ownership
27
Evaluation on taxing monopoly profits
Risk of tax avoidance / loss of capital investment spending
28
Evaluation on the liberalisation of markets
Smaller businesses may struggle to scale up and compete
29
Evaluation on introducing price capping policies
Monopolists may find revenues in other ways
30
Evaluation of nationalisation
Possible loss of productive efficiency
31
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
32
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
33
Problems with regulation
Not always effective and can give rise to regulatory failure