monopoly

Question 1

1. Incumbent firm

Answer 1

A firm currently in the market.

Question 2

2. Legal barriers

Answer 2

Legal barriers include patents, trademarks and copyright. They enable incumbent firms to legally prevent new firms from stealing their ideas and entering their market.

Question 3

3. Sunk costs

Answer 3

Costs that cannot be recovered.

Question 4

4. High sunk costs

Answer 4

High sunk deter new firms from entering because firms know that if they fail, they won’t be able to recover any of their sunk costs.

Question 5

5.How does economies of scale lead to barrier entries

Answer 5

Economies of scale mean incumbent firms can keep their costs and prices low, creating a barrier to entry because smaller new firms without economies of scale can’t compete on price.

Question 6

6. Brand loyalty

Answer 6

Strong branding from incumbent firms makes it hard for new entrants, with weaker branding, to make any sales.

Question 7

7. Anti-competitive practices

Answer 7

Anti-competitive (or restrictive) practices include anything a firm might do, to restrict competition.

E.g. vertical integration: firms can vertically integrate to take control of scarce resources (like the power grid); and then refuse to let new firms use these scarce resources, stopping them from entering the market.

Question 8

monopoly meaning

Answer 8

pure monopoly - 1 firm in a market

Legal monopoly - the firm has over 25% market share

Question 9

when we model monopoly we assume that

Answer 9

• only one firm in market
• want to maximise profits
• there are high barriers to entry

Question 10

1. Natural monopoly

Answer 10

A natural monopoly is when it’s naturally most efficient if only one firm is in the market.

Question 11

2. Reasons for natural monopolies: high sunk costs

Answer 11

Very high sunk costs mean it would be inefficient if a second firm entered the market and also had to incur those sunk costs - so one firm is most efficient.

E.g. TFL’ sunk costs have been estimated as high as £129bn - it would completely inefficient for a second firm to waste £129bn to enter the market, too.

Question 12

3. Reasons for natural monopolies: huge economies of scale

Answer 12

Huge economies of scale mean it’s most efficient for just one firm to be in the market so it can increase its output massively to reach its MES.

Question 13

1. Price discrimination

Answer 13

Price discrimination is when a firm charges different groups of consumers different prices, for the same good.

E.g. students get lower prices for train tickets than adults.

Question 14

2. Price discrimination condition 1: market power

Answer 14

The firm must have market power: it must be able to change their prices

Question 15

3. Price discrimination condition 2: information on elasticities

Answer 15

The firm must be able to identify which consumers are elastic and which are inelastic.

Question 16

4. Price discrimination condition 3: limit reselling

Answer 16

The firm must be able to limit reselling: it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers

E.g. trains require student IDs or student Oysters, to stop inelastic adult consumers using resold student tickets