Chapter 14: Market structure: monopoly

Question 1

Define monopoly

Answer 1

A form of market structure in which there is only one seller of a good or service

Question 2

Define price maker

Answer 2

A firm that is able to choose the selling price for its good or service, as it faces a downward-sloping demand curve

Question 3

Define dynamic efficiency

Answer 3

A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long-run

Question 4

Define natural monopoly

Answer 4

A monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable

Question 5

Define nationalization

Answer 5

Where a privately owned firm or industry is taken into public ownership

Question 6

Define privatization

Answer 6

Where an enterprise in public ownership us returned to private ownership

Question 7

Define regulatory capture

Answer 7

A situation in which the regulator of an industry comes to represent the industry’s interest rather than regulating it

Question 8

Define first-degree price discrimination

Answer 8

Situation arising in a market whereby a monopoly firm is able to charge each consumer a different price

Question 9

Define third-degree price discrimination

Answer 9

Situation in which a firm is able to charge groups of consumers a different price for the same product

Question 10

Define arbitrage

Answer 10

A process by which prices in two market segments will be equalised by a process of purchase and resale by market participants

Question 11

Name 4 characteristics of a monopoly

Answer 11

1. One firm only in the industry
2. High barriers to entry
3. Profit maximisation in SR and LR
4. No substitutes

Question 12

Name 3 sources of monopoly power

Answer 12

1. Barriers to entry
2. Uniqueness of product
3. Lack of near competitors

Question 13

Name 7 barriers to entry

Answer 13

1. Legislation
2. Limit pricing
3. Control over outlets
4. Natural cost advantage
5. High sunk costs
6. Brand loyalty
7. Economies of scale

Question 14

Draw a monopoly diagram

Answer 14

Diagram sheet

Question 15

Name 4 interpretations of a natural monopoly

Answer 15

1. Occurs when one large business can supply the entire market at a lower price than two or more smaller ones
2. Natural monopoly when there can’t be more than one efficient provider of a good. Hence, competition might increase costs and prices
3. Industry where MES is a large share of market demand such that there’s only room for one firm to fully exploit all available EOS
4. Industry where LRAC curve falls continuously as output expands

Question 16

Name 6 examples of natural monopolies

Answer 16

1. Severn trent
2. Transport for London
3. National grid
4. Royal mail
5. BT
6. Camelot

Question 17

Draw a natural monopoly diagram

Answer 17

Diagram sheet

Question 18

Name 3 reasons why a natural monopoly raises difficult decisions for competition policy

Answer 18

1. It’s more productively and allocatively efficient for there to be only one provider in a natural monopoly
2. Abnormal profits tend to be made but are required to be reinvested to maintain and improve networks
3. Due to the barriers to entry firms may be tempted to exploit their market power and increase prices which would damage consumer welfare

Question 19

Name 4 options for competition policy

Answer 19

1. Nationalisation
2. Price controls by regulators
3. Introduce competition
4. Fines for anticompetitive behaviour

Question 20

Explain why monopolies are not allocatively efficient

Answer 20

1. prices are higher than in competitive markets
2. Leads to a loss of allocative efficiency because price is greater - the firm is turning consumer surplus into producer surplus
3. Regressive on lower income households

Question 21

Why is it not productively efficient

Answer 21

Due to the absence of genuine market competition

Question 22

Is a monopoly x-efficient

Answer 22

No

Question 23

What may higher prices limit

Answer 23

Final market output meaning that fewer economies of scale will be achieved

Question 24

What may protective market mean?

Answer 24

There’s less incentive for research and development

Question 25

Why may monopolies abuse their dominant market position?

Answer 25

To stifle competition

Question 26

How may monopolies stifle competition?

Answer 26

Limit pricing

Question 27

If monopolies get too big what may it lead to?

Answer 27

Diseconomies of scale

Question 28

What does price discrimination give a supplier greater control over? (4)

Answer 28

1. Profit maximisation 2. More revenue 3. Want to fill spare capacity 4. Improves cash flow

Question 29

What 3 conditions must be met for price discrimination

Answer 29

1. The firm must have some market power 2. Ability to segment customers with differences in price elasticity of demand 3. Barriers to prevent consumers from switching suppliers

Question 30

Name 4 methods of price discrimination

Answer 30

1. Time 2. Branding 3. Geography 4. Customer type

Question 31

Name 3 advantages of price discrimination

Answer 31

1. Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss 2. If they make abnormal profits they can reinvest into R and D which will help everyone 3. Some consumers will benefit from lower prices

Question 32

Name 5 disadvantages of price discrimination

Answer 32

1. Some customers will end up paying high prices and these prices are likely to be allocatively inefficient 2. Decline in consumer surplus 3. Those who pay higher prices may not be the richest 4. There may be administrative costs in separating the markets 5. Profits from price discrimination may be used to finance limit or predatory pricing

Question 33

Name 10 examples of price discrimination

Answer 33

1. Time of purchase 2. Airline travel and time of departure 3. Quantity purchased 4. Coupons 5. Age discounts 6. Mans tested student fees 7. Resident parking charges 8. Dutch auction for car registration plates 9. Loyalty cards 10. choosing your seat early