Monopolies Flashcards
Define concentrated market?
A market dominated by a small number of large firms
What is a monopoly?
A firm that is the sole seller of a product with no close substitues. The closeness of its substitutes determines its power.
What are the characterisitics of a monopoly?
Dominant/single seller
No close subs
High barriers to entry and exit
Differentiated product
Price maker
How does the CMA define market power?
its a degree, allows firms to profitably sustain prices above competitive levels or restrict output.
How can concentration be measured?
4 firm concentration ratio - add up market share of the 4 largest firms and divide by 4.
Herfindahl index - Ei (Si)2 so if two firms control the whole market the index is 0.5(squared) + 0.5(squared) = 0.5
What is the relationship between price and MC in a monopoly?
Monopolists set a price that is greater than MC determined by the AR/D curve at the profit max output point.
What is the drawback of monopolies restricting output?
People willing to consume the profduct at P>MC still may not be able to buy the product.
What is innovation and its importance?
Improving exisiting products and processes to increase efficiency. It is essential for LR growth.
What is essential for innovation to be successful?
Acquiring a patent is essential so that innovators can charge a price higher than MC so they can make economic profits.
Why is their slow wage growth in some nations around the world?
Globalisation and technological change (becoming more capital intensive), monopsony power of employers, decrease in union powers.
Why can monpolies make supernormal profits in the LR?
Due to barriers of entry;
EoScale
EoScope
Network economies
Learning economies
Product differentiation/brand loyalty
Control of distribution
Legal protection
What are the different types of barriers?
Statutory (legal)
Innocent (exist due to nature of market and production)
Strategic (created by the firm)
What is a natural monopoly?
A market whereby it is better off without competition as if there was more than one firm operating in the market and sharing market demand the EOS would not be bug enough to cover the LRAC.
What is the importance of competition policy?
Protects interests of customers, prevents agreements such as cartels, prevents predatory behaviour limiting competition, prevents mergers and takeovers.
What is first degree price discrimination? What is the drawback? Explain what happens to surplus?
Charge each individual the max price they would be willing to pay. Hard to know what the maximum consumers are willing to pay and can’t be used for selling mass product. There is no consumer surplus, all producer surplus, no DWL.
