Monopoly

Question 1

characteristics of a monopoly

Answer 1

• One seller dominating the market
• Pure monopoly (theoretical extreme one firm = 100%) or monopoly power (legal monopoly, 25+% power)
• Differentiated products – firm is a price maker
• High barriers to entry/ exit – SNP can persist over time
• Imperfect information
• Firm is a profit maximiser - MR = MC

Question 2

statically?

Answer 2

• Allocative efficiency – P>MC monopolies charging higher than costs, so low consumer surplus as well as limiting output to make these products – q1 could be higher
• Productive efficiency – forgoing EoS, by not producing at lowest AC, if firm gets too large, then they may get DEoS.
• X efficiency – X inefficiency is occurring because of complacency and it is hard to actually cut these costs

inefficient

Question 3

dynamically?

Answer 3

• efficient as firm is earning SNP, which can be reinvested into improving tech/ innovation.

Question 4

PROS

Answer 4

• Dynamic efficiency, producers could gain patents
• Greater EoS potential if the firm is bigger
• Natural monopoly
• Cross subsidisation

Question 5

CONS

Answer 5

• Allocative inefficiency – less consumer surplus, as price> MC, restricted output/quality/choice + DWL of CS
• Productive inefficiency – forgo EoS, not at minimum costs, so price is not minimized
• X inefficient – complacency
• Inequalities in necessity markets – poor could suffer more in groceries and food/ drink markets

Question 6

EVAL

Answer 6

• Dynamic efficiency not guaranteed, could pay debts or give shareholder money
• Eos or DEoS depends on the size of the firm
• Objective – what if objective is sales max
• Regulation – can reduce inefficiencies
• Price discrimination can exaggerate the negatives of monopolies
• Competition/ threat of competition which could reduce inefficiencies
• Natural monopoly + type of good made here – essential good is not good for consumers

Question 7

why do monopolies cause DWL?

Answer 7

• reduce the level of society surplus compared to competitive markets.
• Society surplus at pcqc is area A+B+C+D+E
• Society surplus at PmQm = A+B+D
• DWL of consumer surplus of C
• DWL of producer surplus at E

Question 8

Natural monopoly e.g.

Answer 8

• water distributors
• internet distributors
• rail

Question 9

characteristics of natural monopoly

Answer 9

• Huge FC of infrastructure , so potential for EOS, AC = TC/Q, if TC is so ridiculously high, then you need very high Q to reduce costs – which means potential for economies of scale - MES point will occur at a high quantity level
• Rational for one firm to supply the entire market – competition is undesirable, because any firm entering after the first doesn’t have EoS market, so when they get pushed out, they leave all their infrastructure idle – a waste
• Competition would result in a wasteful duplication of resources and non-exploitation of full EoS – allocative and productive inefficiency

Question 10

regulation in natural monopoly

Answer 10

• Regulators will come regulate the natural monopolists due to the essential nature of the products being provided.

Question 11

regulated to

Answer 11

allocatively efficient point, but firm is making a loss

Question 12

how to cover subnormal profit as a result of regulation

Answer 12

Usually a subsidy will be provided that covers this loss. However in the long term, although consumers are benefitting, there’s no incentive for natural monopolists, so most of these industries are state run.

Question 13

​pointless to encourage competition ​since

Answer 13

would raise average costs for the industry. If any new firm enters the market, they will be easily priced out as their costs will be so much higher.

Question 14

impact of natural monopoly on firms:

Answer 14

● Monopolists have potential to make ​huge profits for shareholders through profit max
● existence of SNP means firms have finance for investments and able to build up ​reserves to overcome ST difficulties​.
● Firms with monopoly power able to ​compete against large overseas organisations​.
● Large firms will be able to maximise economies of scale, reducing costs and increasing profit further.
● but, firms may ​not always choose to profit max ​cause of X-inefficiencies, sales or revenue maximising, profit satisficing or contestability leading to limit pricing.
- In the long run, the lack of competition ​may mean that firms become complacent and so they may not make maximum profits.

Question 15

impact of natural monopoly on employees:

Answer 15

● Monopolists produce at lower outputs, so will ​employ fewer workers​.
● but, the ​inefficiency of the monopoly mean employees receive higher wages, directors and senior managers.
- Profit satisficing or sales/revenue
maximising mean output higher so more employees employed.

Question 16

impact of natural monopoly on suppliers:

Answer 16

depend on the extent to which the monopolist is also a monopsonist​. If a monopsonist, it will reduce the suppliers’ profits as the monopolist will decrease prices.

Question 17

impact of natural monopoly on consumers:

Answer 17

● With ​natural monopoly​, consumers tend better off than competition.
● When firms enjoy ​economies of scale​, will be more efficient and customers will enjoy a higher consumer surplus.
● Monopolists produce more range of goods or services due to cross subsidisation.
use of price discrimination allow for ​survival of a product or service​, benefits some customers (those in the cheap market) whilst is negative for others.
● Consumers may pay ​higher prices and see a ​poorer quality service​, due to a lack of competition.
● There is ​less choice​ for consumers, since there is only one firm producing the good.

Question 18

Pure monopoly

Answer 18

where one firm is the ​sole seller of a product in a market​.

Google - 88% owned

Question 19

Efficiency of monopoly

Answer 19

● A monopoly is ​productively inefficient, ​since they don’t produce at MC=AC. They are also ​not allocative efficient​ as P>MC.
● Since a monopolist is likely to make supernormal profits, they will be ​dynamically efficient.​ However, if there is no competition, they may have no incentive to invest

Question 20

Graphical analysis of efficiency in monopoly

Answer 20

• shift from PC to monopoly means less output, leading to deadweight loss
• fall in consumer surplus
• may experience x inefficiency due to lack of competition
• however, large EOS though

Question 21

Joseph Schumpeter argued

Answer 21

Schumpeter argued that monopolies will have large retained profits and will be able to exploit new products or production techniques without worrying about competitors. This would make them ​more productively efficient​, as costs are lower, ​more allocative efficient, as there are new products in the market, and ​dynamically efficient