Monopoly (Micro) Flashcards
Cards describing conditions for a monopoly, monopoly power, barriers to entry and potential drawbacks.
What is a monopoly?
A market where the good or service is supplied by a single firm.
What is monopoly power?
The power of a firm to act as a price maker.
Does a firm need to be in a pure monopoly to have monopoly power?
No
What are the barriers to entry in a monopoly?
Natural barriers
Economies of scale
Legal barriers
Product differentiation
Sunk costs
What are natural barriers to entry?
Climatic, geographic or geological barriers such as accessibility of oil.
What are economies of scale in regards to being a barrier to entry?
as output increases, costs fall and so firms can set prices below what new entrants would be able to. As well as cheaper costs of bulk buying from suppliers.
Why is product differentiation a barrier to entry?
Money spent on ads to gain customer loyalty, such as with coke, means new firms can’t compete.
What are sunk costs?
Costs of entering a new market which cannot easily be recovered if a firm isn’t succesful.
What are some advantages of a monopoly?
Economies of scale
SN profit reinvested into R&D
Innovation
Lower prices for consumers (potentially)
What are some disadvantages of a monopoly?
Productively and allocatively inefficient. (X- inefficiency)
Diseconomies of scale
Exploitation of prices
What is a natural monopoly?
Where only one firm can benefit from economies of scale such as with utilities.
What will the firm in a natural monopoly experience?
Continuously falling long run average costs.
