Week 10 - Monopoly and Monopolistic Competition

Question 1

What are the 3 sources/barriers to entry of a monopoly?

Answer 1

1. Monopoly resources → A single firm owns a key resource required for production.
2. Government regulation → The government gives a single firm the exclusive right to produce a good or service.
3. The production process: A single firm can produce output at a lower cost than a larger number of firms.

Question 2

Define the term ‘Natural Monopoly’?

Answer 2

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Question 3

What is ‘Price discrimination’?

Answer 3

The business practice of selling the same good at different prices to different customers.

Question 4

Define the term ‘Arbitrage’?

Answer 4

The process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference.

Question 5

What is ‘Perfect price discrimination’?

Answer 5

Describes a situation in which the monopolist knows exactly each customer’s willingness to pay and can charge each customer a different price.

Question 6

Name 4 examples of price discrimination?

Answer 6

1. Movie tickets
2. Airplane tickets
3. Store brands

4.Quantity discounts

Question 7

Name the 4 ways that government policymakers can deal with the problems of monopolies?

Answer 7

1. By trying to make monopolised industries more competitive
2. By regulating the behaviour of the monopolies
3. By turning some private monopolies into public enterprises
4. By doing nothing at all.

Question 8

What are ‘competition laws’?

Answer 8

Laws that promote competition by regulating the behaviour of firms with market power.

Question 9

Define the term ‘Oligopoly’?

Answer 9

A market structure in which only a few sellers offer similar or identical products.

Question 10

What is ‘Monopolistic competition’?

Answer 10

a market structure in which many firms sell products that are similar but not identical.

Question 11

What are the 3 attributes of a monopolistic market?

Answer 11

1. Many sellers → numerous firms are competing for the same group of customers.
2. Product differentiation → Each firm offers a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downward-sloping demand curve.
3. Free entry and exit → In the long run, firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are driven to zero.

Question 12

Define the term ‘Monopoly’?

Answer 12

the only seller of a good or service that does not have a close substitute.

Question 13

Name an example of a monopoly?

Answer 13

An example is DeBeers, which is a company that controls over 80% of diamond sales through the Diamond Trading Company (DTC)

Question 14

Name the 4 sources of monopoly?

Answer 14

1. Exclusive resource control → (e.g., De Beers, Alcoa)
2. Government monopolies → (e.g., patents, Australia Post)
3. Network effects → (e.g., Facebook, telecoms)
4. Natural monopoly → (e.g., utilities, one firm is cheapest)

Question 15

Fill in the following gaps: Competitive firms are _________ (must accept the market price), whereas monopolies are _________ (can control prices due to lack of competition).

Answer 15

price takers, price makers

Question 16

What is the concept of allocative efficiency?

Answer 16

markup of price over marginal cost. Buyers who value the good at more than the marginal cost of production, but less than the price, will be deterred from buying it, creating a deadweight loss.