LS10 : Monopoly Flashcards
what are the five assumptions of the monopoly model?
- single seller of a good
- no substitutes for the good
- high barriers to entry and exit from the market
- aim to profit maximise
- imperfect knowledge
why is it assumed that there is a single seller in a monopoly?
means the monopoly firm is insulated from competition
why is it assumed there are no substitutes in a monopoly?
means the monopoly firm is insulated from competition
why is it assumed there are barriers to entry in a monopoly?
ensures the monopoly firm can sustain its market position
why is a monopoly a price maker?
having no competitors and no close substitutes allows the monopoly to influence the price in the market
what is efficiency like in a monopoly?
since monopolies are price setters, where MC=MR
- not productively efficient as they don’t produce on lowest point of LRAC
- not allocatively efficient as they don’t produce where P=MC or S=D
- not X-inefficient as don’t have incentive to control costs
when drawing a monopoly diagram, how do you determine the level of output produced by the monopolist?
MC=MR (profit maximising output level)
which diagram is used to show profit maximisation in a monopoly?
show qty and price where MC=MR
which diagram is used to show losses made by a monopoly?
show AC above AR
what diagram is used to show an increase in demand in a monopoly?
since AR=D, shift curve outwards. shift MR since AR and MR have a positive relationship
what is third degree price discrimination?
when different groups of consumers are charged different prices for the same good or service
what are the three conditions that a firm needs to be able to price discriminate?
- must have market power
- must have info about consumers and their willingness to pay and must be identifiable differences between consumer groups
- consumers must have limited to resell the product
explain why a firm must have market power for price discrimination.
seller must have the ability to set the price, rather than be price takers (like in perfect competition)
explain why a firm must have information about consumers for price discrimination.
it needs to be able to identify different groups of consumers with different willingness to pay. different consumers display different sensitivities to price changes (have different PEDs). this allows firms to be more profitable
explain why there can be no ability to resell for price discrimination.
consumers would engage in arbitrage. consumers who have access to the lower price would buy up the product and then create profit by reselling to other consumer groups.
