Monopoly

Question 1

What is a Monopoly?

Answer 1

A Market structure where there is one seller dominating the market, typically with more than 25% market share.

Question 2

What are the characteristics of a Monopoly?

Answer 2

1. High barriers to Entry/Exit
2. Firms are Price Makers
3. Differentiated Products
4. Firms are Profit Maximisers [MC=MR]
5. Imperfect Information

Question 3

What are some barriers to entry in a Monopoly?

Answer 3

1. Economies of Scale
2. Legal Barriers [i.e Patents]
3. Absolute Costs
4. Brand Loyalty
5. Limit Pricing

Question 4

What is the Profit Maximising Condition for a Monopoly?

Answer 4

MC = MR

Question 5

What is the efficiency of monopolies?

Answer 5

Dynamically Efficient
Statically Inefficient

Question 6

Why are Monopolies Statically Inefficient?

Answer 6

1. Consumers are exploited as prices are charged greater than MC - Consumer Surplus is eroded
2. Resources do not follow consumer demand
3. Firms do not operate at the lowest point of AC
4. Firms are Complacent

Question 7

What is Complacency in a Monopoly and how is it linked to X-inefficiency?

Answer 7

Due to a lack of competition, a monopolist does not have the incentive to improve products or become more efficient.

This is linked to X-inefficiency as monopolists do not produce on their AC curves, on the lowest point, or reduce waste.

Question 8

How does a DWL occur in a Monopoly?

Answer 8

1. Firms restrict output and drive up prices which erodes consumer surplus as some groups are priced out.
2. This shows the inefficiencies of a monopoly compared to a competitve market where P = MC.

Question 9

Why is the DWL a concern?

Answer 9

Consumers are exploited and society surplus is eroded which worsens the allocative efficiency problem causing a market failure.

Producers still gain SNP which leads to a relatively higher producer surplus in comparison.

Question 10

What are some disadvantages of a Monopoly?

Answer 10

1. Static inefficiency
2. Inequalities in Necessity Markets
3. Consumer Exploitation

Question 11

What are some Advantages of a Monopoly?

Answer 11

1. Dynamic Efficiency
2. Greater Economies of Scale compared to Competitive Firms
3. Cross Subsidisation
4. Natural Monopolies

Question 12

What is a Natural Monopoly?

Answer 12

A market where one firm can supply the entire industry demand at a lower cost than competing firms due to economies of scale.

Question 13

What are the characteristics of a Natural Monopoly?

Answer 13

1. High Fixed Costs
2. MES point is at higher quantities
3. High potential for economies of scale

Question 14

Why is it rational for one firm to supply the market?

Answer 14

It does not lead to wasteful duplication of resources & non-exploitation of economies of scale

Question 15

Why is competition undesireable in this market?

Answer 15

• First Mover Advantage : The first firm to enter the market has all the benefits of economies of scale
• New entrants will be priced out as they do not have the same benefits, which leads to static inefficiency

Question 16

What is needed for a Natural Monopoly to comply and survive

Answer 16

Regulation

Question 17

How might a government regulate a Natural Monopoly?

Answer 17

1. Subsidies to cover subnormal losses
2. Nationalisation
3. Price Regulations

Question 18

How does Nationalisation Regulate a Monopoly?

Answer 18

1. Removes the profit motive
2. Prioritises Social Welfare

Question 19

What are some Evaluation Points to consider about a Monopoly?

Answer 19

1. Does Dynamic Efficiency Actually Occur?
2. Economies / Diseconomies of Scale
3. Objectives of a Monopoly may not necessarily be Profit Maximisation
4. Threat of Competition can exist in reality
5. Type of good/service [i.e necessities vs luxuries]
6. If the Monopoly is Regulated or not

Question 20

Define Limit Pricing

Answer 20

A strategy used by dominant firms to discourage competition by setting the price low enough that it is not profitable for new entrants, but enough for monopolists to cover costs and make a profit.

Question 21

Where is the limit price set on a diagram?

Answer 21

Below the AC curve of a competitor, indicating high risk for new entrants and a sacrifice of short run profits for a monopolist

Question 22

What are some Evaluation Points for Limit Pricing?

Answer 22

1. Principle Agent Problem
2. Short run strategy
3. Actual Level of Competition Threats
4. Regulatory Risks