Monopoly Flashcards
Pros & Cons of a Monopoly
EoS means low prices maybe (Diagram on Micro poster)
Could cross-subsidise other loss-making goods thus greater range of G&S for consumers
Schumpeter argued that monopolies can exploit new products without worry of competitors, making them more productively efficient (as costs are lower), more allocatively efficient (as new products in the market) and dynamically efficient
Cons
Higher prices for consumers, less CS (draw Prof Max. Diagram then also draw point where Sales Max is (AR=AC), SHADE TRIANGLE OF DIFFERENCE TO HIGHLIGHT LOSS OF CS.
High prices especially bad in necessity market, extent to which monopoly is bad depends on type of market
X-Inefficiency
Types of Monopoly
Pure Monopoly - Single seller (closest example is Google at 88%) Working monopoly - Over 25% Super monopoly - Over 40%
Barriers to entry in Monopolies
High barriers to entry - Need capital in some markets, sunk costs (crude oil industry). These protect producer surplus
Contestable Market
Low barriers to entry and exit
Monopoly behaviour
Assume they are profit maximisers (MR=MC), but some may charge much lower prices than others to keep low barriers to entry (See 7Micro Diagrams Poster)
Monopoly Diagram
Supernormal profit so AR > AC. Rectangle between the two is SNP MC=MR (PROFIT MAXIMISING)
3rd Degree Price Discrimination
Where monopolists charge more to certain groups than others e.g. off-peak v on-peak train times
Pros & Cons of 3rd Degree Price Discrimination
Pros Increased profits Those in the ELASTIC market (e.g. off peak) gain as they pay a lower price than they otherwise would. Cons Consumers in the inelastic market (on peak) have to pay a higher price ,’, less consumer surplus
Monopoly def.
Legal monopoly = Where one firm holds over 25% of market power
Natural Monopoly
there is only room in a market for one firm to fully exploit the economies of scale that are available and therefore achieve productive efficiency e.g. Royal Mail, National Rail Pointless to encourage competition as it would raise AC for the industry. Any new entry will be easily priced out as their costs are so much higher
Natural Monopoly Diagram
Natural Monopoly Efficiency
Neither allocatively or productively efficient as there is no minimum on the AC curve, and at allocative efficiency would be a loss
Pros & Cons of a Natural Monopoly (Firms, employees, suppliers, consumers)
Firms - Huge profits for shareholders through prof. max. EoS means more profit. Can lead to X-inefficiency as no competition
Employees - Produce at lower outputs ,’, employ fewer workers. Inefficiency of natural monopoly could mean employees earn higher wages, especially senior managers
Suppliers - Depends how far the monopolist is a monopsonist. If monopsonist this will decrease prices thus revenue
Consumers - EoS means more efficient so consumers have higher consumer surplus. Cross subsidization can increase range of goods and services. Price discrimination benefits those in the ELASTIC MARKET. Less choice and could face higher prices and poor customer service due to no competition
Efficiency of Natural Monopolies
Productively inefficient as they dont produce at MC=AC. Also not allocatively efficient as P>MC. Can be dynamically efficient IF they reinvest. X-inefficiency could prevent that however
Cons of Monopoly Diagram (loss of consumer surplus)
Draw Prof Max and the SNP (Ppm, Qqm)
Then draw Rev Max on same diagram (Prm, Qrm)
In the triangle of difference, highlight this and then annotate as Deadweight Loss of Consumer Surplus
