monopolies Flashcards
What is monopoly power influenced by
Barriers to entry
Economies of scale
Limit pricing
Owning a resource
Sunk costs
Brand loyalty
Set-up costs
Advertising
Number of competitors
Degree of product differentiation
Costs to consumers of monopolies
Usually, price discrimination results in a loss of consumer surplus. Since P > MC, there is a loss of allocative efficiency.
It strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers.
Benefits for consumers of a monopoly
As they can price discriminate they might choose to charge those of a higher income more therefore benefiting those of a lower income. and reducing the level of inequality
Costs for producers of a monopoly.
If use predatory pricing the firm could face investigation.
It might cost the firm to divide the market, which could limit the benefits gained.
Benefits of monopoly for producers
Producers make better use of spare capacity.
Higher supernormal profits could help stimulate investment.
A different market could be cross subsidised.
Types of price competition
Price wars- when firms constantly cut their prices below that of its competitors. Then the competitors lower theirs to match. etc
Predatory pricing- Firms setting low prices to drive out firms already in the industry. In the SR they make a loss but in the LR they gain.
Limit pricing- Low prices discourage the entry of other firms, so there are low profits. It ensures the price of a good is below that which a new firm entering the market would be able to sustain.
Types of non-price competition
Increase loyalty
Improve quality of customer service
Loyalty cards
Advertising and marketing
Differentiation
Characteristics on a monopoly
Profit maximisation
Sole seller
High barriers to entry
Price maker
Price discrimination
Limit pricing
When AC = AR
Is when a firm sells a good at a low price so it would be unprofitable for other firms to enter the market
Predatory pricing
Is when the average cost is greater than the average revenue
