monopolies Flashcards
characteristics of a monopoly
more than 25% market share high barriers to entry advertising and product differentiation - product thought to be more desirable and thus gives price making power few competitors in the market price making power
profits for monopolies
supernormal profits even in the long run
profit max point
MC = MR
why do they have supernormal profits
supernormal profits not competed away due to high barriers to entry
monopoly efficiencies
not productively efficient - MC is not equal to AC at the long run equilibrium point (thus the firm is not operating at the lowest point on the AC curve)
not allocatively efficient - price charged is greater than MC so producers are being over rewarded for the products they are providing
disadvantages of a monopoly
may become complacent - no incentive to innovate or respond to changing consumer preferences#
no need to increase efficiency
consumer choice restricted
higher prices for consumers
monopsonist power may be used to exploit suppliers
what is a monopsony
a market with a single buyer - can force suppliers to supply cheap because they are the only buyer
however, the low price could be passed onto consumers
advantages of a monopoly for the firm
They can charge higher prices and make more profit than in a competitive market
They can benefit from economies of scale – by increasing size they can experience lower average costs – important for industries with high fixed costs and scope for specialisation.
They can use their monopoly profits to invest in research and development and also build up cash reserves for difficult times
why governments might tolerate monopolies
It is difficult to break up monopolies. The US government passed a lawsuit against Microsoft, suggesting it should be split up into three smaller companies but it was never implemented.
Governments can implement regulation of Monopolies e.g. OFWAT regulates the prices for water companies. In theory, regulation can enable the best of both worlds – economies of scale, plus fair prices. However, there is concern about whether regulators do a good job – or whether there is regulatory capture with firms gaining generous price controls.
disadvantages of monopoly for the firm
inefficient - maybe wasteful spending
may result in diseconomies of scale so the cost per unit increases
advantages of a monopoly to consumers
economies of scale could pass down lower costs to consumers
supernormal profit means the firm could invest more to make the product better however it depends on the firm’s aims
certain industries e.g. pharmaceutical with vaccines or medicine - monopoly power and money incentivises firms to research into medicine to become a monopoly and make more money but as a result make something beneficial for society
disadvantages of a monopoly for consumers
higher prices for consumers due to lack of competition
lack of choice
less incentive to innovate and make good quality products
disadvantages to workers due to monopoly
if the firm is the only one in the market it can abuse the power and lower wages
advantages to workers
potentially increase wages due to supernormal profits
increased financial security of firm could increase job security and wages
disadvantages to suppliers
monopsony power - single buyer could force the suppliers to sell lower at a loss
advantages to suppliers
large bulk orders
good demand level for their products
natural monopoly characteristics
extremely high fixed costs followed by large economies of scale which are continuous
having several competitors would be inefficient and more expensive
only one firm in the market
conditions for price discrimination
seller must have some price making power
must b able to distinguish separate groups of customers that have different PEDs
prevent seepage - people buying at low price and reselling themselves at higher price
what does price discrimination do for firms
transfers consumer surplus to producer in the form of additional revenue
what is first-degree price discrimination
each individual charged the maximum they are willing to pay, turning all consumer surplus to revenue, however very difficult to gather all this info and difficult to prevent seepage
what is second degree price discrimination
often used in wholesale markets where lower prices are charged for people who buy in bulk
turns some consumer surplus into revenue and encourages large orders
what is third degree price discrimination
when a firm charges different prices for different segments of the market eg ages, different times, different places
how to maximise profits with third degree price discrimination
seller sets price for each group where MC=MR, so higher price for inelastic and lower for elastic
advantages of price discrimination
results in an increase in revenue for seller
this revenue could be used to further invest in the product to make it better or even cheaper
extra revenue helps fund for people who have less money - income redistribution
