Monopoly Flashcards
Monopoly
A market structure where one firm supplies all output in the market without facing competition
Pure Monopolies
A market in which one company has 100% control over the entire market for a product. Usually because of a barrier to entry such as a technology only available to that company eg Royal Mail, Thames Water.
Firms may have monopolistic control in other types of market structure eg Cartels
Natural Monopolies
Monopolies that have arised due to the nature of the market.
They often include utilities (water, gas, electricity), telephones, suppliers or cable TV providers.
An example is British Rails, due to it being more efficient to only have one train rail in the UK.
What allows for natural monopoly?
Nationalisation (Gov only allows one firm) eg DEWA in the UAE
Raw Material Availability
Economies of Scale (Can reduce costs for some firms to enter the market)
Strong Brand Name
Artificial Barriers to Entry
Deliberate action by incumbent firms to prevent new firms from entering the market.
Strategic entry barriers include;
Patients, setting prices deliberately low, deliberately building excess capacity.
Advantages and Disadvantages of Monopoly Firms
Pros;
Little to no competition
Stability within market
Higher prices with lower quality items
Exploit Economies of Scale
Advancement in technology - as firms are able to earn abnormal profits in the long run, there may be a faster rate of technological advancements
High revenue for the government (high prices mean higher corporate tax)
Cons;
Consumer Exploitation
Reduction in consumer utility - Monopolies may use lower quality materials, decreasing consumer utility
Less incentive to innovate (due to less competition)
Lack of variety of products for consumers
Less incentive for entrepreneurs.
Less efficient use of resources
Maybe hard for employees to find a new job due to specialisation.
Revenue Curves for a monopolist
As prices decrease, total revenue decreases
As price increases, total revenue increases
https://bit.ly/2J7Pa6w
Profit Maximising Level of Output Diagram - https://bit.ly/2J6Awk3
Price Discrimination
Where identical or largely similar goods or services are sold at different prices by the same provider in different markets (eg different age groups)
This allows a monopolist to earn higher profits that it would if it was to charge the same price in all markets.
How may a monopolist choose to discriminate?
Time - Firms may charge different prices at different times (eg rail station charge more when people are going to work)
Places - Price may vary due to place
Income - Monopolists may be able to split people based on income and charge more for higher income earners eg healthcare, lawyers
Conditions for a monopolist to be able to price discriminate effectively.
Market must be imperfect (eg monopoly, oligopoly)
Markets must have some element of PED (elastic, inelastic)
Prevention of resale
Identification of different market sectors
Geographical Location
Cookies, digital footprint eg search history
Degrees of Discrimination
1st Degree - Perfect Price Discrimination
A firm can charge a different price for every unit they sell eg Auction business
2nd Degree Price Discrimination
Charging different prices for different quantities of buying in bulk
3rd Degree Price Discrimination
Consumer willingness and ability to buy a good/service.
