Monopoly & Monopoly Power

Question 1

Characteristics of Monopoly:

Answer 1

• Profit Maximisation
• Sole seller in a market (a pure monopoly)
• High barriers to entry
• Price maker
• Price discrimination
• E.g Google dominates search engine market, w/ 90% share

Question 2

Factors Influencing Monopoly Power

Answer 2

• Barriers to Entry: Higher the barriers to entry = easier to maintain monopoly power (e.g EoS, Sunk Costs, Brand Loyalty)
• No. of Competititors: Fewer firms = lower barriers to entry, harder to gain large market share
• Amount of Product Differentiation: More differentiated (E.g quality, pricing & branding), easier to gain market share. More unique = fewer competitors the firm faces

Question 3

Profit Maximising Equilibrium

Answer 3

• Monopolist earns supernormal profits in SR & LR, when MC = MR, produce an output of Q1 at price of P1
• Shaded rectangle shows area of supernormal profits
• Since firm is sole supplier, the firm’s cost & revenue curve is same as industry’s cost & revenue curve
• P>MC in the diagram, due to profit maximisation which occurs at MC = MR, so there is allocative inefficiency
• AR > AC, so there are supernormal profits

Question 4

Adv. & Disadv. Of Monopoly

Answer 4

Advantages:
- Supernormal profits, invest in R&D, dynamically effecient in LR
- Natural monopoly, more efficient for only 1 firm to provide g&s, having duplicates of same infrastructure is wasteful (e.g inefficient & wasteful to have 2 sewer companies)
-* Generate export revenue*
-* High profits source of gov rev.* through tax

Disadvantages:
- Higher prices, profits & inefficiency result in misallocation of resources compared to competitive market
- Higher prices, good is under-consumed, so loss of allocative efficiency is market failure
- No incentive to be more efficient
- Loss of consumer surplus & gain of producer surplus
- Consumers do not get choice in a monopoly