Monopoly and monopoly power Flashcards
What is a monopoly
when there’s only one firm in the market
Define pure monopoly
a firm with 100% market share - only one firm (rare because at some point other firms will enter)
What is considered a legal monopoly by firms and what does this means
when its market share is over 25% (when a firm owns more than 25% of the market).
- means the firm has monopoly power
What three assumptions do economists make when they model monopolies
- They assume there is only one firm in the industry with 100% control over the market - to simplify the model
- We assume the firm is a profit maximiser (when MC = MR)
- We assume there are high barriers to entry
(otherwise other firms will enter the market and the monopoly will no longer be a monopoly)
State 4 factors which monopoly power is influenced by
- barriers to entry
- The number of competitors in the market
- advertising
- the degree of product differentiation
Factors affecting monopoly power: barriers to entry
The higher the barriers to entry, the easier it is for firms to maintain monopoly power
Factors affecting monopoly power: there are 4 barriers to entry, state them
- legal barriers
- sunk costs
- economies of scale
- brand loyalty
Type of barrier to entry: state what legal barriers include and state what this allows for firms
Legal barriers include patents, trademarks and copyright which allow firms to legally prevent other firms from stealing ideas of incumbent firm (a firm already in the market) and entering the market.
Type of barrier to entry: state what sunk costs are and why this may deter new firms from entering the market
Sunk costs is the money that cannot be recovered when a firm leaves the market
- deter new firms from entering as they know that if they fail, they won’t be able to recover any of their sunk costs (cost of failure is high)
Type of barrier to entry: state how economies of scale is a barrier to entry (small firm vs big firms)
Big firms use internal economies of scale to reduce their long run average costs (LRAC).
- smaller firms cannot compete with their lower prices
Type of barrier to entry: how is brand loyalty a barrier to entry
Strong branding from incumbent firms makes it impossible for new firms to make any sales - there is customer loyalty
factors which monopoly power: The number of competitors
If there are many competitors, competition is high = less market share.
If there are not many competitors, competition is low = greater market share
factors which monopoly power: state how Advertising may affect monopoly power
Advertising can increase consumer loyalty, making demand price inelastic, and creating a barrier to entry
factors which monopoly power: state how The degree of product differentiation affects monopoly power
The more the product can be differentiated, through quality, pricing and branding, the easier it is to gain market share. This is because the more unique the product seems, the fewer competitors the firm faces.
Where will a monopoly profit maximise in the short run and long run and state hwy this is good
Where MC=MR
- Monopolies can earn significant supernormal profits
Why is a monopoly profit maximising bad
They are not being productively efficient, where MC=AC
- they are bing productively inefficient, producing at a higher cost and lower quantity
+
They are not being allocatively efficient, where MC=AR
- there are producing at high costs and lower quantities
What is X inefficiency
when a firm is producing above its average cost curve for agivenlevel of output.
State how a monopoly is x inefficient
They have high profits and barriers to entry to keep out competitors and so tend to get lazy and inefficient, letting costs increase above their average cost curve
What is dynamic efficiency, state where does this occurs and what firms need to have dynamic effeminacy
dynamic efficiency is how changing technology improved output potential over time
- occurs when AR > ATC.
- firms need supernormal profit to invest in R&D
State how monopolies are usually dynamically efficient and why this actually may not be a good thing
Monopolies will be dynamically efficient because they are making supernormal profit.
- BUT, there is no guarantee the supernormal profit will be invested in R&D. To increase dynamic efficiency, it depends on the CEO.
What is a natural monopoly
when it’s naturallymost efficientif only one firm is in the market.
If monopolies are so inefficient, why does the government support and own monopolies
Because of natural monopolies
Why might a monopoly be a natural monopoly (state example to support e.g. TFL )
- High sunk costs E.G. TFL, Oyster card tech development and training staff - which have been estimated as high as £129bn. It would be inefficient if a second transport firm entered the market and duplicated this £129bn cost, so it’s most efficient to have just one firm, TFL, in the market.
- Huge internal economies of scale e.g. TFL could use technical economies to invest in specialist technology like the oyster card system and self-service ticket stations to replace staff, and reduce wage costs + To fully exploit these economies of scale and get to its MES, TFL needs to increase its sales massively - which it can only do if it’s the only seller in the market.
What is a natural monopolies long run marginal cost curve like
the LRMC is below a firms LRAC
State advantage of a monopoly
- profit maximisation
- dynamically efficient
- natural monopoly
State disadvantages of a monopoly
- productively inefficient
- allocatively inefficient
- x inefficient
