Theme 3.4.5 Flashcards
(21 cards)
Define pure monopoly
A structure in which a single supplier produces and sells a given product or service
Define a legal monopoly (monopoly power)
When one firm has 25% + market share
Give the characteristics of monopolies
One seller dominates the market
Differentiation products-> firms are price makers
High barriers to entry/exit
Imperfect information
Firms are profit maximisers
What is the profit maximising condition
MC=MR
What can we say about monopolies in terms of efficiency?
They’re statically efficient yet have the potential to deliver dynamic efficiencies
Why aren’t monopolies productively efficienct
They voluntarily forego internal economies of scale by not producing at the minimum point of AC
Define price discrimination
Monopolists charges different prices to different consumers for an identical g/s with no differences in cost of production
What are the 3 necessary conditions for price discrimination
Price making ability
Information to separate the market
Prevent resale (market seepage)
Define third degree price discrimination
When firms segment the market based on different PED values
Give the advantages of price discrimination
Dynamic Efficiency
Economies of Scale
Some consumers benefit
Cross subsidisation
Give the disadvantages of price discrimination
Allocative inefficiency
Inequalities
Anti competitive pricing
Give examples of 3rd degree price discrimination
Movie theatres: students, children and seniors pay less than adults
Airlines: different prices to different groups depending on the time of booking and type of traveler
Public transport : discounts for students, seniors or residents (e.g city cards or senior passes) - different fares based on usage or demographics patterns
Define a natural monopoly
When it’s naturally most efficiency of only 1 firm is in the market
What are the characteristics of a natural monopoly?
High sunk/fixed costs
Enormous potential of E.O.S
Rational for 1 firm to supply the entire market - competition is undesirable
Competition would result in a wasteful duplication of resources and non exploitation of full E.O.S
Describe the characteristic of a natural monopoly: high sunk/fixed costs
to minimise AC, NMs require a huge qty = ENORMOUS potential of E.O.S (AC= TC/Q)
Describe the following characteristic of a natural monopoly: rational for 1 firm to be in the market
M.E.S ( where all E.O.S are exploited) will occur at a very high qty
What is the formula for average cost
AC= TC/Q
Describe the following characteristic of a natural monopoly : competition -> wasteful duplication of resources and non exploitation of full E.O.S
The first firm in the market has got the E.O.S advantage so if any other firm was to enter later, they won’t have the same E.O.S advantage as the first one and eventually they’ll be priced out of the market.
As they leave the market, all of their infrastructure/resources will be left idle = WASTEFUL-> A. Inefficiency
If there’s competition there won’t be the full exploitation of E.O.S and we won’t get to the quantity level of the M.E.S point -> productive inefficiency -> naturally with competition firms aren’t going to be of the possible greater size compared to if they were dominating the market, smaller firms won’t produce the same quantity as one firm dominating the market.
Why would competition lead to allocative inefficiency in a natural monopoly?
The first firm in the market has got the E.O.S advantage so if any other firm was to enter later, they won’t have the same E.O.S advantage as the first one and eventually they’ll be priced out of the market.
As they leave the market, all of their infrastructure/resources will be left idle = WASTEFUL-> A. Inefficiency
Why would competition lead to productive inefficiency in a natural monopoly?
If there’s competition there won’t be the full exploitation of E.O.S and we won’t get to the quantity level of the M.E.S point -> productive inefficiency -> naturally with competition firms aren’t going to be of the possible greatest size compared to if they were dominating the market, smaller firms won’t produce the same quantity as one firm dominating the market.
Why is the AC curve downward sloping in a natural monopoly ?
AC is downward sloping over the relevant range of outputs.
This indicates that as production increases, average cost per unit decreases due to significant E.O.S.
