Monopoly

Question 1

Assumptions

Answer 1

1. Only one firm = pure monopoly
2. Working monopoly = if a firm is responsible for over 25% of an industry’s sales.
3. Barriers to entry maintain monopoly.

Question 2

Structural Barriers to entry:

Answer 2

Not deliberately erected.
1. Natural monopoly
===when only enough economies of scale exist for one firm.
2. Exit barriers (eg. Bethlehem steel had liabilities of $10 bn)
3. High cost of entering a market (can be behavioural too).

Question 3

Behavioural barriers to entry:

Answer 3

Deliberately erected by firms.. eg/.

1. Advertising/brand loyalty
2. brand proliferation.
3. Legal restrictions (patents etc)
4. Anti-competitive behaviour
5. Loss leaders

Question 4

Why are monopolies bad?

Answer 4

1. Not necessarily allocatively or productively efficient - just luck whether or not it is.
2. X-inefficiency
3. don’t NEED to be dynamically efficient.

Question 5

Why are monopolies good?

Answer 5

1. Natural monopolies - at least someone is supplying the good (eg/. anglican water)
2. Dynamic efficiency - firms want to maintain monopoly by staying ahead of any possible competition, plus they have the abnormal profit incentive/resources to do so.
3. Can benefit from economies of scale more easily than firms in perfect competition.
4. Pure monopolies avoid the wasteful duplication of research in an industry.
5. Money spent in pursuit of maintaining monopoly may result in socially beneficial results through the sponsorship of sport or charity events etc.

Question 6

key evaluative idea

Answer 6

How narrowly do you define the market?