Chapter 14

Question 1

What is a monopoly?

Answer 1

If a firm has more than 25% of market share

Question 2

What is a pure monopoly?

Answer 2

When a firm has 100% market share

Question 3

Where does a monopoly maximise profits

Answer 3

MR=MC

Question 4

What are problems with monopolys

Answer 4

• Higher prices. Firms with monopoly power can set higher prices (Pm) than in a competitive market (Pc). (Red area is supernormal profit)
• Allocative inefficiency. A monopoly is allocatively inefficient because in monopoly (at Qm) the price is greater than MC. (P > MC). In a competitive market, the price would be lower and more consumers would benefit from buying the good. A monopoly results in dead-weight welfare loss indicated by the blue triangle. (this is net loss of producer and consumer surplus)

* Productive inefficiency A monopoly is productively inefficient because the output does not occur at the lowest point on the AC curve.

* X – Inefficiency. – It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms.Therefore the AC curve is higher than it should be.
* Supernormal Profit. A monopolist makes Supernormal Profit Qm * (AR – AC ) leading to an unequal distribution of income in society.

• Higher prices to suppliers – A monopoly may use its market power (monopsony power) and pay lower prices to its suppliers. E.g. supermarkets have been criticised for paying low prices to farmers. This is because farmers have little alternative but to supply supermarkets who have dominant buying power.
• Diseconomies of scale – It is possible that if a monopoly gets too big it may experience dis-economies of scale. – higher average costs because it gets too big and difficult to coordinate.
• Lack of incentives. A monopoly faces a lack of competition, and therefore, it may have less incentive to work at product innovation and develop better products.
• • Lack of choice. Consumers in a monopoly market face a lack of choice. In some markets – clothing, choice is as important as price

Question 5

What are advantages of monopolies

Answer 5

Economies of scale
Research and development fromsupornormal profits
Be more effiecent due to market share (x-efficent)
Global competition

Question 6

Evaluation of Monopolies

Answer 6

If no economies of scale its significatnto have choice
monopolies maybe needed in certain industries due to high costs
Goverment can regulate monopolies to gain benefits from economies of scale and also stopping higher prices

Question 7

How can monopolies develop

Answer 7

Horizontal Integration. Where two firms join at the same stage of production, e.g. two banks such as TSB and Lloyds

Vertical Integration. Where a firm gains market power by controlling different stages of the production process. A good example is the oil industry, where the leading firms produce, refine and sell oil.

Legal Monopoly. E.g. Royal Mail or Patents for producing a drug.

Internal Expansion of a firm Firms can increase market share by increasing their sales and possibly benefiting from economies of scale. For example, Google became a monopoly through dominating the search engine market.

Being the first firm e.g. Microsoft has created monopoly power by being the first firm.

Question 8

Regulation of monopolies

Answer 8

Price capping RPI-X to limit price increase
prevent mergers
Windfall tax on monopoly profits
Investigating abuyse of monopoly power, e.g. collusion

Question 9

When do firms sales maximise

Answer 9

AR=AC

Question 10

When do firms revenue maximise

Answer 10

MR = 0