monopoly

Question 1

characteristics of monopoly

Answer 1

CMA deems: working monopoly - firm with greater than 25% of the industries total sales

dominant firm - has at least 40% market share

Question 2

Monopoly

Answer 2

single supplier that dominates the entire monopoly

Question 3

Working monopoly

Answer 3

Business with more than 25 percent share of a defined market

Question 4

natural monopoly

Answer 4

natural monopolies exist in industries where there aresuch substantial economies of scale and very high sunk costs that only one firm is viable

Question 5

assumptions of a monopoly

Answer 5

• only one firm operates in the market
• the product it produces is unique - there are no rival producers(substitutes)
• there are high barriers to entry and exit
• imperfect knowledge, while firm knows about its pricing and output decisions, consumers are not privy to this information
• price setters

Question 6

price discrimination

Answer 6

when a firm charges different prices for the same good or service

Question 7

examples of price discrimination

Answer 7

market haggling
mobile phone contract discounts
taxi fares at peak times
educational bursaries
cinema price tickets

Question 8

conditions for price discrimination

Answer 8

1. Firms have sufficient monopoly (market) power.
   a. Monopolists always have pricing power – i.e. they are price makers not takers.
2. Identifying different market segments.
   a. I.e. groups of consumers with different coefficients of price elasticities of demand.
3. Ability to separate different groups.
   a. Requires information / sufficient market intelligence on the purchasing behaviour of consumers.
4. Ability to prevent re-sale (arbitrage).
   a. No secondary markets exist where arbitrage can take place at intermediate prices e.g. limiting sales,
   minimum age-restrictions, compulsory use of ID cards at the point of sale.

Question 9

What are some of the main aims of price discrimination?

Answer 9

1. To increase total revenue by extracting consumer surplus and turning it into producer surplus.
2. To increase total profit providing the marginal profit from selling to customers is positive.
3. To generate cash-flow especially during a recession including during the recent pandemic.
4. To increase market share and build customer loyalty – it is cheaper to sell to an existing customer 5. To make more efficient use of a firm’s spare production capacity.
5. To reduce the amount of waste and cut the cost of keeping products in stock / storage.

Question 10

1st degree price discrimination

Answer 10

• 1st degree
  o This involves charging different prices for each individual unit purchased – i.e. people pay their own
  individual willingness to pay – perhaps through a haggling process.

Question 11

2nd degree price discrimination

Answer 11

o Prices varying by quantity sold e.g. bulk purchase discounts.
o Prices varying by time of purchase e.g. peak-time prices.

Question 12

3rd degree price discrimination

Answer 12

Charging different prices to groups segmented by elasticity of demand, income, age, sex.

Question 13

Arbitrage

Answer 13

Simultaneous buying and selling of securities, currency, or commodities in different markets to take advantage of differing prices for the same asset.

Question 14

Bi-lateral monopoly

Answer 14

Where a monopsony buyer faces a monopsony seller in a market

Question 15

Concentration ratio

Answer 15

Measures the proportion of an industry’s output or employment accounted for by the largest firms

Question 16

dominant firm

Answer 16

a business with more than 40% of market share

Question 17

Entry barriers

Answer 17

Strategies used to protect the market power of established firms whilst maintain supernormal profits

Question 18

Industry regulator

Answer 18

appointed by government to oversee how a market works and the outcomes that result for producers and consumers

Question 19

Legal monopoly

Answer 19

A monopoly that is protected by law from competition e.g. through patents or government-awarded franchise

Question 20

limit pricing

Answer 20

When a firm sets price low enough to discourage new entrants into the market.

Question 21

market liberalisation

Answer 21

introducing competition in previously monopolistic sectors such as energy supply, retail banking and postal services

Question 22

market power

Answer 22

Power to raise price above marginal cost without fear of losing supernormal profits to new entrants

Question 23

Market segmentation

Answer 23

Splits up a market into different types (segments) to enable a business to better target its products to the relevant customers

Question 24

monopoly profit

Answer 24

Supernormal profit to a firm with market power, achieved when price (AR) > average cost

Question 25

natural monopoly

Answer 25

When long-run average cost (LRAC) falls continuously over a large range of output so only one firm can fully exploit economies of scale

Question 26

predatory pricing

Answer 26

A deliberate strategy of driving competitors out of the market by setting low prices or selling below AVC

Question 27

Price discrimination

Answer 27

Charging different prices to different groups of consumers for the same product for reasons not associated with the marginal cost of supply

Question 28

pure monopoly

Answer 28

The only supplier in an industry - with a 100 percent market share. The firm is the industry

Question 29

Regulated monopoly

Answer 29

A business with market power regulated through price-capping or some other form of intervention

Question 30

Welfare loss

Answer 30

verall reductions in consumer welfare when firms use their market power to raise price above a competitive level

Question 31

willingness to pay

Answer 31

The maximum price at or below which a consumer will definitely buy one unit of a product.

Question 32

X-inefficiency

Answer 32

When the lack of competition leads to higher average costs than necessary to supply a given output

Question 33

pros of monopoly

Answer 33

dynamic efficiency from super normal profits

Economies of scale - set lower prices - car manufacturers

cross subsidisation

regulated monopolies

Question 34

cons of monopoly

Answer 34

Allocative inefficiency
productive inefficiency
inequalities in necessity markets
profit may not be reinvested
less incentive to be X efficient
higher prices

Question 35

evaluation of monopoly

Answer 35

economies or diseconomies of scale?

what is the business objective of the firm

price discrimination may intensify inequalities

there still may be competition - or contestibility

type of good or service?

natural monopoly?

Question 36

monopsony

Answer 36

single buyer of a good or service in a market associated with purchasing power

Question 37

key features

Answer 37

Key Features: Single seller, unique product, price maker, high barriers to entry.

Question 38

Example

Answer 38

Utilities like water or electricity in certain regions where one company has exclusive rights.

Question 39

efficiencies

Answer 39

Monopolies often lack both allocative and productive efficiency due to their market power and lack of competition.

Question 40

bi-lateral monopoly

Answer 40

Situation where there is a single (or few) buyer(s) and seller(s) of a given product

Question 41

De-regulation

Answer 41

Opening up of markets to competition by reducing one or more barriers to entry

Question 42

Duopsony

Answer 42

Two major buyers in a market each of whom has significant buying power with suppliers

Question 43

entry barriers

Answer 43

Ways to prevent the profitable entry of new suppliers

Question 44

Franchise monopoly

Answer 44

When the government grants a company the sole right to sell or manufacture a product or service in a particular area