Monopolies and oligopolies Flashcards

Question

costs of a monopoly (FOR A FIRM)

Answer 1

1. Lack of Incentive to Innovate 🧠 With limited or no competition, the firm may face less pressure to innovate ⟶ This can lead to complacency and missed opportunities for new products or cost savings ⟶ Rivals in other markets may develop better technology or business models ⟶ The monopolist risks being disrupted in the long run. 2. Risk of X-Inefficiency ⚙️ Monopolies face less pressure to control costs as profits are usually guaranteed ⟶ This can lead to wasteful spending, slack labour productivity, or inflated bureaucracy ⟶ Over time, higher costs make the firm less agile and less competitive if conditions change ⟶ The firm becomes vulnerable to sudden shocks or market liberalisation. 3. Regulatory Scrutiny and Intervention 🧾 Being a monopoly attracts government attention due to potential consumer harm ⟶ Firms may be subject to price controls, investigations, or forced breakups ⟶ Complying with regulation increases legal and admin costs ⟶ These factors reduce the firm’s flexibility and decision-making power. 4. Diseconomies of Scale 📉 As the firm grows too large, coordination, communication, and motivation problems may arise ⟶ These diseconomies of scale increase average costs and reduce efficiency ⟶ The firm may struggle to maintain productivity and consistent quality ⟶ Profit margins could fall despite the monopoly position.

Answer 2

1. Economies of scale and lower prices - monopolies achieving eos can reduce production costs, potentially lowering prices for consumers - lower costs also allow firms to produce at a larger scale, meeting consumer demand more 2. innovation through r&d - supernormal profits allow monopolies to invest in research and development, creating higher quality products or entirely new goods over time - consumers benefit from access to innovative and improved products over time 3. International competition - a domestic monopoly may face competition from foreign firms, incentivising it to maintain efficiency and competitive pricing - this ensures consumers still gain access to better prices and quality

Answer 3

1. Higher Prices 💸⬆️ Monopolies are price makers, setting prices above marginal cost ⟶ Leads to higher prices compared to perfect competition ⟶ Consumers face reduced real incomes and lower affordability ⟶ This results in lower consumer surplus and welfare loss. 2. Restricted Output 📉📦 To maximise profits, monopolists produce where MC = MR, not where supply meets demand ⟶ Leads to allocative inefficiency, where some consumers willing to pay more than MC don’t get the product ⟶ Causes under-consumption of potentially beneficial goods ⟶ Reduces overall welfare and satisfaction for consumers. 3. Lack of Consumer Choice 🛒🚫 With no close substitutes, monopolists dominate the market ⟶ Consumers are forced to buy a single option, even if it doesn't meet preferences ⟶ This limits diversity and innovation in products and services ⟶ Leads to consumer dissatisfaction and loss of utility. 4. Poor Quality and Service : Due to lack of competitive pressure, monopolists may have less incentive to innovate or improve quality ⟶ Consumers receive inferior goods or services at higher prices ⟶ This leads to lower value for money ⟶ Resulting in a decline in consumer satisfaction and welfare.

Answer 4

1. monopsony power over suppliers - a monopoly with monopsony power(**A BILATERAL MONOPOLY**) may exploit suppliers by forcing lower prices, which can reduce suppliers revenues and stifle innovation or production at earlier stages of the supply chain - this can have knock on effects of the broader economy, such as reduced investment and job losses in upstream industries

Answer 5

- occurs when it is most efficient for one firm to supply the entire market, due to high fixed costs and significant eos - own 100% market share

Answer 6

- national grid - tfl - thames water

Answer 7

- large fixed costs, result in a downward-sloping long-run average cost (LRAC) curve, where increasing output reduces average costs. - effective for one provider to serve the market. Allowing multiple firms to build duplicate tracks would create wasteful duplication, driving up costs and increasing fares for consumers. - A single operator can achieve economies of scale, such as bulk purchasing of equipment or better use of management expertise, further lowering average costs. - govt subsidises any losses

Answer 8

- wasted products - productive and allocative efficiency

Answer 9

if it is regulated

Answer 10

- no allocative efficiency or productive - firm sets price where costs = mr, this restricts output and increases price - as they provide essentials, this is unsustainable in the long run, so governments enforce regulations

Answer 11

- prices are lowered to where P = MC - increased output - however AC is greater than AR, so there’s a huge loss - usually a subsidy is given that is the same value of the loss - allows them to make normal profits in LR

Answer 12

- significant economies of scale - minimum efficient scale is very high - productively efficient for one firm to operate in the industry - pricing for allocative efficiency leads to losses - case for government ownership or subsidy, or right regulation

Answer 13

where a firm charges different prices to different consumers for an identical good with no differences in costs of production

Answer 14

- firm needs price making ability, so need some kind of monopoly power - need to have information to separate the market into different PED, eg identify consumers with inelastic PED so they can charge higher prices - prevent reselling (market seepage)

Answer 15

when a firm is able to segment the market into different ped. so there’ll be one group of consumers with inelastic PED and one with elastic PED - a firm will recognise that based on things like age, income, time differences, and will therefore charge different prices to different groups - eg rail company

Answer 16

Dynamic Efficiency - PD enhances firm profitability, enabling greater investment in R&D. - Supernormal profits generated from higher-paying consumer groups can fund innovation, product development, and technology improvements. 1. Increased Revenue & Profit 📈 Firms charge higher prices to inelastic consumers and lower to elastic ones ⟶ This allows firms to capture more consumer surplus as producer surplus ⟶ Overall revenue and supernormal profit increase ⟶ Supports sustainability and growth, especially in monopolistic markets. 2. Better Capacity Utilisation 🏭 Lower prices at off-peak times or for certain segments attract more customers ⟶ Fixed resources like trains, gyms, or cinemas are used more efficiently ⟶ Average costs fall due to spreading fixed costs over more units ⟶ Improves productive efficiency and profitability. 3. Discourages Entry & Strengthens Market Power 🚫 Firms with pricing power can use price discrimination to undercut potential rivals ⟶ This can reduce contestability and protect market share ⟶ Maintains monopoly power and long-term profit stability. 4. Allows for Cross-Subsidisation 🎯 Profits from high-paying segments can subsidise lower-paying ones ⟶ Helps maintain presence in low-margin or loss-making markets ⟶ Can support corporate social responsibility goals while still being profitable.

Answer 17

📉 Consumer Harm (Exploitation) 🔗 Price discrimination can exploit consumers by charging them higher prices than they would pay under uniform pricing 🔗 Some consumers, especially those with inelastic demand, end up paying more than others for the same product 🔗 This leads to inequality in how consumers are treated, as some may feel unfairly charged for the same product or service 🔗 As a result, consumer welfare can decrease, especially for vulnerable groups ⚖️ Inefficiency in the Market 🔗 Price discrimination can lead to allocative inefficiency, where resources are not distributed in the most efficient way 🔗 When firms price differently based on consumer willingness to pay, it may result in overpricing for some groups and underpricing for others 🔗 This can cause misallocation of resources, where some consumers who value the product highly may be priced out, while others who value it less may get a cheaper deal 🔗 In the long term, this may reduce overall market efficiency, as it disrupts the balance between supply and demand 🏆 Barriers to Entry for Competitors 🔗 Price discrimination can give established firms an unfair competitive advantage by allowing them to charge different prices to different groups 🔗 New entrants may struggle to compete, as they would have to offer uniform pricing, which could limit their ability to attract customers 🔗 This may lead to less competition in the market, potentially stifling innovation and preventing consumers from benefiting from lower prices or better products 🔗 As a result, barriers to entry increase, and monopoly power can become entrenched 💸 Administrative Costs 🔗 Implementing price discrimination often requires additional administrative costs to segment the market and track consumer behavior 🔗 Firms need to gather data, develop pricing strategies for different consumer groups, and potentially adjust prices in real-time 🔗 These costs can be significant, especially for small firms, and might not be worth it if the gains from discrimination are small 🔗 In some cases, these administrative efforts can actually reduce overall profitability in the long run 🔄 Consumer Confusion and Backlash 🔗 Consumers may become confused or frustrated when they discover they are paying different prices for the same product 🔗 This can lead to a negative perception of the business and may result in consumer backlash, especially if the price discrimination seems unfair or arbitrary 🔗 Negative reviews and social media campaigns can tarnish a company's reputation 🔗 Over time, this backlash can damage brand loyalty and reduce demand among certain consumer groups

Answer 18

Increased Access for Lower-Income Consumers 🧾 Price discrimination allows firms to charge different prices to different groups ⟶ Lower-income consumers may pay less (e.g. student discounts, off-peak fares) ⟶ This makes goods/services more accessible to those who might otherwise be excluded ⟶ Consumer surplus increases for these groups. Higher Revenue Sustains Services 💸 Charging higher prices to inelastic consumers boosts firm revenue ⟶ This extra profit can subsidise provision in less profitable areas ⟶ Services may remain available in rural or low-demand areas that would otherwise be unprofitable ⟶ Consumers benefit from continued access where the market would otherwise fail. Encourages Output Expansion 📦 Firms can segment the market and sell extra units to more price-sensitive consumers ⟶ This increases total output compared to uniform pricing ⟶ More consumers can benefit from the product ⟶ Allocative efficiency may improve in some cases. Promotes Dynamic Efficiency and Innovation ⚙️ Higher profits from price discrimination can be reinvested in R&D ⟶ This can lead to better quality, innovation, or lower costs over time ⟶ Consumers benefit from improved products and services in the long run ⟶ Especially true in sectors like pharmaceuticals or tech.

Answer 19

1️⃣ High Fixed Costs → Significant Economies of Scale Certain industries (e.g., utilities, railways) require massive upfront investment in infrastructure (e.g., power grids, rail networks). 🔽 As firms produce more output, average costs (AC) continue to fall because fixed costs are spread over a larger quantity of goods/services. 🔽 This creates significant economies of scale, meaning a single large firm can operate at a lower cost per unit than multiple smaller firms. 2️⃣ Duplication of Infrastructure Would Be Inefficient If multiple firms tried to compete in a natural monopoly sector (e.g., building multiple electricity grids in one city), each firm would have to set up its own expensive infrastructure. 🔽 This would result in wasteful duplication and drive up total industry costs, leading to higher prices for consumers. 🔽 Thus, allowing a single firm to dominate ensures that resources are used efficiently, keeping costs lower. 3️⃣ Declining Long-Run Average Cost (LRAC) → Single Firm Can Always Undercut Competitors Due to high fixed costs and economies of scale, a single firm can always produce at a lower cost per unit than any new entrant. 🔽 If a new firm tries to enter, it lacks the same cost advantages and must charge higher prices to remain profitable. 🔽 As a result, the incumbent firm can price out competitors, making competition unsustainable in the long run. 4️⃣ Essential Service Provision → Monopoly Prevents Market Failure Many natural monopolies exist in essential sectors (e.g., water supply, electricity, rail transport), where reliability and universal access are crucial. 🔽 If multiple firms operated in these markets, some areas might be underserved (e.g., rural areas with low profitability). 🔽 A single regulated monopoly ensures continuous service provision, avoiding market failure due to under-provision of essential services. 5️⃣ Contestability Is Limited → High Barriers to Entry Natural monopolies often involve huge sunk costs (e.g., power plants, water pipelines), making entry extremely difficult for new firms. 🔽 Even if a competitor enters, it cannot recover these sunk costs if forced to exit, discouraging investment. 🔽 This means the market remains inherently uncompetitive, reinforcing the idea that it is more efficient for a single firm to dominate.

Answer 20

1. Lack of Significant Economies of Scale ❌📉 In a natural monopoly, average costs fall as output increases due to high fixed costs ⟶ But if a sector shows constant or rising average costs after a certain point ⟶ It means there are no extensive economies of scale left to exploit ⟶ Suggests that multiple firms can operate efficiently, so it’s not a natural monopoly. 2. Presence of Effective Competition 🏁📊 If many firms can enter and survive in the market without excessive costs ⟶ This indicates low barriers to entry and that one firm doesn’t dominate ⟶ No firm benefits uniquely from massive scale ⟶ Therefore, the sector is not naturally monopolistic. 3. Duplicated Infrastructure Exists 🏗️⚡ Natural monopolies often arise due to high infrastructure costs (e.g., water pipes, electricity lines) ⟶ But if competing firms build their own infrastructure (e.g., broadband providers) ⟶ This shows infrastructure is not prohibitively expensive ⟶ So the market can support competition, meaning it’s not a natural monopoly. 4. Firms Operating at Efficient Scale Without Dominating Market Size 📦📏 In natural monopolies, the minimum efficient scale (MES) is so high that only one firm can reach it ⟶ But if many firms operate at MES and none dominate output ⟶ It suggests economies of scale are exhausted early ⟶ Therefore, the sector is not a natural monopoly.

Answer 21

🔹 1️⃣ Limit Pricing (Discouraging Market Entry) An incumbent firm sets prices low (just above average cost) to make it unprofitable for new firms to enter the market. This protects market share and reduces long-term competition. Existing firms benefit from lower competition, maintaining a dominant position. Consumers might enjoy lower prices initially, but could face higher prices in the long run due to reduced competition. 📌 Example: Amazon uses limit pricing by keeping profit margins low, making it difficult for new retailers to compete. 🔹 2️⃣ Predatory Pricing (Driving Out Competitors) A firm temporarily sets prices below cost to force competitors out of the market. Once rivals exit or become weak, the firm raises prices to recoup losses. This eliminates competition, leading to higher long-term profits. Consumers benefit from short-term low prices, but in the long run, they may face monopoly pricing. 📌 Example: Uber vs. Local Taxi Firms – Uber used very low fares to drive traditional taxis out of business, then later increased prices. 🔹 3️⃣ Price Matching (Maintaining Market Share) Firms promise to match competitors' prices, reducing the incentive for customers to switch. This prevents price wars, while still keeping prices low for consumers. Consumers feel reassured that they are getting the best deal. Firms retain market share while maintaining brand loyalty. 📌 Example: John Lewis’ ‘Never Knowingly Undersold’ policy guaranteed to match competitors' prices, keeping customers loyal. 🔹 4️⃣ Price Discrimination (Maximizing Revenue) Firms charge different prices to different consumer groups based on willingness to pay. This allows businesses to maximize revenue and profits by capturing more consumer surplus. Consumers with lower willingness to pay (e.g., students) can access goods at cheaper rates. Helps firms cover fixed costs and reinvest in innovation and quality improvements. 📌 Example: Airlines charge different fares for economy, business, and first-class passengers based on demand elasticity.

Answer 22

🔹 1️⃣ Advertising (Brand Loyalty & Market Power) Firms invest heavily in advertising to increase brand recognition and customer loyalty. This helps create perceived product differentiation, even if the actual product is similar to competitors'. Consumers become less price-sensitive, allowing firms to charge premium prices without losing demand. The firm gains market power, reducing the risk of competitors stealing market share. 📌 Example: Coca-Cola vs. Pepsi – Coca-Cola’s strong brand image through advertising helps maintain high demand, despite similar pricing. 🔹 2️⃣ Product Design & Packaging (Perceived Quality & Differentiation) Firms invest in unique product designs and packaging to differentiate themselves from competitors. Aesthetic appeal and functionality enhance perceived value, making consumers willing to pay more. Differentiation helps firms reduce price elasticity of demand, allowing for higher profit margins. Strong branding through packaging can create repeat purchases and brand loyalty. 📌 Example: Apple’s sleek product design & eco-friendly packaging create a premium feel, justifying higher prices. 🔹 3️⃣ Customer Service (Loyalty & Competitive Edge) Firms invest in after-sales support, warranties, and personal customer interactions. High-quality customer service reduces consumer uncertainty, making them more likely to choose a trusted brand. This leads to repeat purchases and positive word-of-mouth marketing, lowering customer acquisition costs. Firms can charge higher prices without losing demand, as consumers value service over just cost. 📌 Example: John Lewis’ excellent customer service and free returns policy encourage loyalty and premium pricing. 🔹 4️⃣ Provision of Complementary Products or Services (Enhanced Value Proposition) Firms bundle products or offer additional services to enhance the overall customer experience. This makes switching to competitors more difficult, increasing customer retention. Bundling complementary products increases consumer surplus, leading to higher perceived value. Firms generate additional revenue streams beyond the core product. 📌 Example: Microsoft Office comes bundled with Word, Excel, and PowerPoint, making it more attractive than buying alternatives separately.

Answer 23

📊 Depends on the Elasticity of Demand Across Consumer Groups Price discrimination is only profitable if different consumer groups have different price elasticities of demand ➡️ If the firm misjudges elasticity and sets prices too high for elastic consumers, sales could fall ➡️ This would reduce total revenue, especially if marginal cost is low ➡️ ⏩ So profits may fall unless the firm segments the market accurately 💡 Depends on the Cost of Separating Markets To price discriminate, firms must prevent resale and identify different groups ➡️ This may require data collection, legal controls, or different versions of a product, increasing costs ➡️ If these costs are too high, they may outweigh the extra revenue ➡️ ⏩ Profitability only rises if administrative costs are low 📉 Depends on the Nature of Competition In highly competitive markets, rivals may undercut discriminatory prices ➡️ This can erode market share or force the firm to lower prices ➡️ This reduces the ability to sustain price differences across segments ➡️ ⏩ So price discrimination may not lead to higher profits if competition is strong 🧾 Depends on Regulatory Intervention or Public Backlash Price discrimination, especially in essential goods (e.g. utilities, drugs), may face regulatory limits ➡️ Governments may cap prices or fine firms for perceived unfairness ➡️ Firms might also face consumer backlash and brand damage ➡️ ⏩ This can reduce long-term demand or trigger intervention that harms profits

Answer 24

💡 Advantage 1: Higher Prices and Profits Cartels allow firms to coordinate pricing and reduce competition. → By controlling supply and setting prices, cartel members can increase prices above competitive levels. → Higher prices lead to increased profits for the firms involved in the cartel. → This allows them to generate more revenue, potentially enabling reinvestment or higher returns for shareholders. 💡 Advantage 2: Reduced Competition Cartels can limit competition by setting production quotas and market shares. → This leads to higher market concentration and less price competition. → Reduced competition can make the market more predictable, allowing firms to plan and forecast better. → Firms benefit from the stability provided by the cartel agreement, which can enhance long-term profitability. 💡 Advantage 3: Economies of Scale When firms within a cartel coordinate their production, they may be able to achieve economies of scale. → Larger production volumes across cartel members can reduce per-unit costs. → This can lead to lower production costs for the cartel members, boosting their profitability. → Over time, these economies of scale may also result in greater market control for cartel members. 💡 Advantage 4: More Investment in Research and Development With higher profits, cartel members may have greater financial resources to invest in research and development (R&D). → Increased R&D can lead to innovation and improved products. → These innovations can give cartel members a competitive advantage, enhancing their market position. → The stability and predictability of the cartel might encourage long-term investment in product development.

Answer 25

💡 Disadvantage 1: Higher Prices for Consumers Cartels reduce competition by fixing prices and output levels. → This leads to higher prices for consumers as firms can charge more without fear of losing market share. → Consumers face reduced consumer surplus due to the inflated prices. → As a result, cartels lead to inefficiency in the market and a loss of welfare for consumers. 💡 Disadvantage 2: Reduced Incentive for Innovation Cartels can reduce the pressure to innovate. → With less competition, firms are less incentivized to improve products or adopt new technologies. → This results in static market conditions, where innovation stagnates, leading to a lack of dynamic efficiency. → Over time, cartel members may become complacent and fail to offer better products or services. 💡 Disadvantage 3: Potential for Cartel Breakdown Cartels rely on firms cooperating to maintain high prices and control supply. → However, firms within the cartel may cheat or undermine the agreement by offering lower prices to gain market share. → This can lead to a collapse of the cartel as trust between members breaks down. → The breakdown can result in market instability and a return to competitive pricing. 💡 Disadvantage 4: Legal Risks and Penalties Cartels are illegal in many countries due to their anti-competitive nature. → Firms involved in cartels can face heavy fines and legal consequences if caught by regulators. → These legal penalties can damage a firm's reputation and harm its long-term profitability. → The risk of detection and prosecution acts as a deterrent to cartel formation, but for those who do engage in such behavior, it poses a major downside.

Answer 26

💡 Disadvantage 1: Higher Prices for Consumers Cartels reduce competition by fixing prices and output levels. → This leads to higher prices for consumers as firms can charge more without fear of losing market share. → Consumers face reduced consumer surplus due to the inflated prices. → As a result, cartels lead to inefficiency in the market and a loss of welfare for consumers. 💡 Disadvantage 2: Reduced Incentive for Innovation Cartels can reduce the pressure to innovate. → With less competition, firms are less incentivized to improve products or adopt new technologies. → This results in static market conditions, where innovation stagnates, leading to a lack of dynamic efficiency. → Over time, cartel members may become complacent and fail to offer better products or services. 💡 Disadvantage 3: Potential for Cartel Breakdown Cartels rely on firms cooperating to maintain high prices and control supply. → However, firms within the cartel may cheat or undermine the agreement by offering lower prices to gain market share. → This can lead to a collapse of the cartel as trust between members breaks down. → The breakdown can result in market instability and a return to competitive pricing. 💡 Disadvantage 4: Legal Risks and Penalties Cartels are illegal in many countries due to their anti-competitive nature. → Firms involved in cartels can face heavy fines and legal consequences if caught by regulators. → These legal penalties can damage a firm's reputation and harm its long-term profitability. → The risk of detection and prosecution acts as a deterrent to cartel formation, but for those who do engage in such behavior, it poses a major downside.

Answer 27

A concentration ratio is the total market share of the four largest firms in a market.

Answer 28

a market structure where a single buyer (monopsony) and a single seller (monopoly) interact

Monopolies and oligopolies Flashcards

(52 cards)