Types of Markets - Monopoly Flashcards
What is a Monopoly?
Monopoly is where a single firm dominates the market
What is a Pure Monopoly?
Pure monopoly is very rare - its when a single firm has 100% market share
But there are some businesses that come close. For example, water businesses and train companies have monopoly on a regional basis.
What does the government define a Monopoly as?
The government defines a monopoly as any business with 25% + of market share. This is because it gives the government the right to investigate any large business that might be taking advantage of its position.
What are the assumptions of a pure monopoly?
1 - There is only one business in the market - 100% market share
2 - They are trying to maximise profits i.e. producing where MR = MC
3 - Very high barriers to entry into a market (Almost impossible for competition to enter)
Downward sloping demand curves
A monopoly will face the downwards sloping demand curve for the market as a whole (there is only one firm). Therefore, if it wants to sell more it will have to reduce its price to both new and existing customers, therefore MR < P. We expect if it is left to its own devices, it will make supernormal profits.
Price discrimination
This is when businesses charge different prices to different groups of consumers for the same product/service. e.g. Trains and peak/off-peak tickets or student discounts.
What businesses are trying to do is charge their different groups the maximum price they are willing to pay.
How can businesses split people up to price discriminate?
1 - Time - when people buy or use that service e.g. peak and off-peak travel
2 - Personal characteristics - Disabled, students, pensioners, children, staff
3 - Geographical basis - Charging different prices according to where you are selling it
EXAMPLE - Types of customers for train companies
1 - Commuters - Buy tickets to get to work by a certain time - have no real alternative, therefore demand will be very price inelastic and they can be charged a much higher price
2 - Leisure purposes - e.g. seeing friends, shopping - People are more flexible - demand tends to be price elastic therefore to encourage more people to travel they will charge lower prices
By doing this, the train companies will be able to maximise the revenue they get from all their customers.
Advantages of a Monopoly
1 - Some consumers will end up paying less - increasing consumer surplus
2 - Help increase a businesses profit - use that money to improve services
3 - Encourage more people to travel off peak so its less busy at peak times
Disadvantages of Monopoly
1 - some consumers will end up paying more - usually people who have no choice but to pay for it. (Due to price discrimination)
What may not be price discrimination?
1 - They are providing a different service
2 - If the price difference is because of different costs e.g. a British firm might charge more for its goods sold in Germany due to export/transport costs.
