monopoly

• What is a characteristic of a monopoly?

  Profit maximisation
• How does a monopolist earn profits?

  By earning supernormal profits in both short and long run
• What defines a pure monopoly?

  Sole seller in a market
• What are barriers to entry in a monopoly?

  High barriers to entry
• What is a price maker?

  A firm that sets its own prices
• What is price discrimination?

  Charging different prices to different consumers
• What market share indicates monopoly power in the UK?

  More than 25% market share
• How does Google exemplify monopoly power?

  It has a 90% market share in search engines
• How can monopoly power be gained in an oligopoly?

  When firms have greater than 25% market share
• What is dynamic efficiency?

  Efficiency over time due to innovation
• What influences dynamic efficiency?

  Research and development, investment, technology
• What is the relationship between dynamic efficiency and consumer needs?

  It meets consumer needs over time
• What factors affect dynamic efficiency in the short run?

  Demand, interest rates, past profitability
• What is x-inefficiency?

  Producing within the average cost boundary
• Why do monopolies tend to be x-inefficient?

  They have little incentive to lower costs
• What are barriers to entry in a monopoly?

  High barriers to entry
• How do economies of scale affect monopoly power?

  They give existing firms a cost advantage
• What is limit pricing?

  Setting prices below production costs for entrants
• How can owning a resource create monopoly power?

  By controlling essential resources for production
• What are sunk costs?

  Unrecoverable costs that deter new entrants
• How does brand loyalty affect market entry?

  It makes it difficult for new firms to compete
• What are set-up costs?

  Costs required to establish a firm
• How does the number of competitors affect monopoly power?

  Fewer competitors lower barriers to entry
• How does advertising create barriers to entry?

  It increases consumer loyalty and demand inelasticity
• How does product differentiation affect market share?

  More differentiation makes gaining market share easier
• What is the profit-maximising equilibrium for a monopolist?

  Occurs at MC = MR
• What does the shaded rectangle in monopoly diagrams represent?

  Area of supernormal profits
• Why is there allocative inefficiency in a monopoly?

  Because P > MC at profit maximisation
• Why are monopolies not productively efficient?

  They do not operate at the lowest AC point
• What is first degree price discrimination?

  Charging each consumer a different price
• What is second degree price discrimination?

  Prices vary according to volume purchased
• What is third degree price discrimination?

  Different prices for different consumer groups
• How does price discrimination affect consumer surplus?


  It usually results in a loss of consumer surplus
• What is a potential benefit of price discrimination for consumers?

  Lower prices for previously excluded consumers
• What is a disadvantage of monopolies regarding consumer choice?

  Consumers have less choice than in competitive markets
• What is a natural monopoly?

  An industry most efficient with one producer
• What is a disadvantage of a natural monopoly?

  Lack of choice for consumers
• What is an advantage of a natural monopoly?

  Benefits from economies of scale
• What are the advantages and disadvantages of monopolies?

  Advantages:

  • Significant supernormal profits for investment
  • Potential for innovation and R&D
  • May generate export revenue

  
  

  Disadvantages:

  • Higher prices and inefficiency
  • Loss of consumer surplus
  • Less consumer choice
• What are the advantages and disadvantages of a natural monopoly?

  Advantages:

  • Economies of scale
  • Reduces inefficient duplication

  
  

  Disadvantages:

  • Lack of consumer choice
  • Risk of overprovision with multiple suppliers