Monopolies Flashcards
(20 cards)
Monopoly
Where one supplier operates in the market
Monopoly power
When a firm has 25% or more market share - defined by Competition and Market Authority (CMA)
Assumptions of a monopoly
Very high barriers to entry as there is one supplier
Firms are price setters (downward sloping AR/MR curves)
Unique good / service being sold
Imperfect information available
Barriers to entry into a monopoly
Incumbent firms have high brand loyalty - lots of money must be spent on advertising so high sunk costs
High sunk costs - highly specialist machinery, R+D, advertising
Legal barriers - patents, regulations (health and safety) e.g. pharmaceutical companies
Customer loyalty - potential entrants would need to spend heavily on advertising to create competition e.g. banks - high loyalty as it is perceived to be effort-taking, lengthy to change
Barriers to exit from a monopoly
Paying off contracts with suppliers + employees (redundancy payments)
Reputational damage may impact demand in other markets that the firm operates in
Need to pay off debts
Depreciation of assets making them difficult to sell
Monopolies - productive efficiency
No
Firms lack incentive to keep costs low
However, firms can exploit economies of scale so can operate close to MES in LR and firms have monopoly power so cost for raw materials is lower
Monopolies - allocative efficiency
No
Firms are incentivised to maximise profit so choose to charge high prices
However, some public sector organisations / charities want to maximise welfare e.g NHS
Monopolies - x-inefficiency
Yes
Lack the incentive to operate on lowest possible AC curve as they will continue to make SNP due to lack of competition in market
Monopolies - dynamic efficiency
Yes
They have the ability to reinvest SNP in improving quality of good
However, they don’t have the incentive due to lack of competition in the market
Natural monopoly
The provision of a service by 1 supplier due to very high fixed costs enabling LRAC to fall over a large output level
e.g. Thames Water, National Rail
Due to very high costs (e.g water pipes or rail tracks) it makes sense for there to be only 1 provider so the fixed costs can be spread over as large an output as possible, enabling price to fall, increasing consumer surplus
Advantages of monopolies to consumers
AE: Monopolists can exploit EoS → lower LRAC → lower prices → higher consumer surplus
DE: SNP can be invested in R=D → increased quality of good
Advantages of monopolies to the firm
Monopolists are price setters so they can charge higher prices and make SNP which can be invested in R+D, enabling firms to become dynamically efficient
LR SNP
Advantages of monopolies to workers
Due to x-inefficiency there is a high chance of keeping your job
High SNP can allow for high wages
Advantages of monopolies to the economy
Natural monopolies can offer lower prices → disinflation
More innovation (dynamic efficiency) → increased LRAS
Advantages of monopolies to suppliers
Monopolists will exploit purchasing EoS, providing suppliers with higher orders and revenue
Disadvantages of monopolies to consumers
Less choice (1 supplier)
Charge higher prices so less consumer surplus
No incentive to invest in R+D so lower quality of good
Advantages of monopolies to the firm
May become x-inefficient so smaller profits
Risk of diseconomies of scale so increased LRAS
Regulator may restrict SNP, market power or price setting power
Advantages of monopolies to workers
1 seller so 1 buyer of labour (monopsonist) so lower wages
Advantages of monopolies to the economy
Higher costs so cost-push inflation
Advantages of monopolies to suppliers
Monopolists are often monopsonists so suppliers have less bargaining power so receive lower prices for their goods
