Term 2 Week 9: Monopoly and Competitive Markets

Question 1

When does a firm have market power, and what are some extreme cases (1,2)

Answer 1

-A firm has market power when they have the ability to affect market price

Extreme cases include:
-A monopoly (single seller in a market)
-A monopsony (single buyer in a market)

Question 2

What is the traditional image of a monopolist, and does it apply in real life (3,1)

Answer 2

-The traditional image of a monopolist is a firm in an industry with large fixed costs
-Large infrastructure costs, such as power and telecoms, give way to natural monopolies, where only a large-scale producer can drive average costs down enough where LRAC<price
-It is more efficient in these industries to only have one producer

-However, the most valuable firms in the world don’t neccessarily align with this picture (5 of the biggest 6 firms are tech)

Question 3

What is a platform (3)

Answer 3

-A platform brings together different parties (buyers and sellers)
-Such platforms experience strong network effects (where new users increase the surplus for current users(more people on youtube = more views = more money = more people who want to make videos)
-Platforms like facebook, uber and airbnb also encounter lock-in (an arrangement where a person/company is obliged to deal only with a specific company)

Question 4

Why do monopolies exist (2)

Answer 4

-Monopolies exist due to barriers to entry
-This is because positive profits would draw the attention of competitors

Question 5

What are different types of barriers to entry (4,2)

Answer 5

Technical barriers:
-Strong increasing returns to scale
-Network effects
-Access to specific raw materials
-Tacit expertise/learning-by-doing

Legal Barriers:
-Patents and trademarks
-Government licences