Monopoly Flashcards
(19 cards)
Monopoly
Refers to a market structure in which a single firm dominates the entire market.
- Usually when a firm has more than 25% market share.
What are the characteristics of a monopoly?
- Single seller
- Unique products with no substitutes
- High barriers to entry
- Supernormal profit in the short run and long run.
Are Monopolies efficient?
- Not allocatively efficient
- Not productively efficient
- X-inefficient
- Are dynamic efficient (supernormal profit can be reinvested)
What is meant by third degree price discrimination?
Occurs when firms charge different prices to different consumers for the same good or service.
e.g. Rail fares are price differently depending on the time of travel.
Are firms price makers or price takers?
Price makers
At what point do firms produce at?
Profit maximising (MC=MR)
What are the necessary conditions needed for price discrimination?
- Market power - firms must have the ability to change prices when there are no substitutes
- Varying consumer PED - Some consumers must be willing and able to pay higher prices
- Ability to prevent resale of tickets
What are the benefits of third degree price discrimination on consumers?
+ Some consumers gain from taking advantage of lower prices, increasing consumer surplus
+ Some consumers gain from higher prices decreasing QDD.
- Some consumers have to pay higher prices lowering consumer surplus.
How do firms benefit from being a monopoly?
- Supernormal profit allows more investment and innovation
- Market power allows global competitiveness
- Economies of scale
- Price discrimination can increase total revenue
How do firms lose from a monopoly?
- Lack of incentive to be efficient due to little competition
- Lack of innovation due to lack of competition
How do employees benefit from monopoly?
- Supernormal profit results in higher wages and job security
How do employees lose from a monopoly?
- Having only 1 supplier in the industry limits the opportunity to change employers
How do consumers benefit from a monopoly?
- Product innovation due to the firm’s supernormal profit may result in better quality products
- Price may fall if the firm benefits from EoS.
How do consumers lose from a monopoly?
- High prices due to no substitutes
- Lack of competition may reduce innovation, leading to a worse product over time.
How do suppliers benefit from being a monopoly?
- Market control - They can dictate the terms and conditions of the market
- Pricing power - Without competition, the firm can set higher prices, leading to higher profits
- Reduced pressure - Firms can focus on long term stability rather than constant innovation to outpace competitors.
How do suppliers lose from a monopoly?
- Monopolies often have power to dictate the price they are willing to pay.
- This price can be unprofitable in the long run.
What is a natural monopoly?
- Occurs when the optimum number of firms in the industry is one.
- Often requires gov intervention such as max price to protect consumers.
- Huge fixed costs
- Enormous potential for Eos
- E.g. Railway track providers
- profit maximisation
- Supernormal profit
What is 3rd degree price discrimination?
Occurs when a firm is able to separate the market into separate price elasticity of demand.
What are the pros and cons of 3rd degree price discrimination?
+ Dynamic efficiency
+ EoS
+ Some consumers benefit
+ Cross subsidisation
- Allocatively inefficient
- Inequalities
- Anti-competitive pricing
Overal CONS > PROS
