Monopolies

18 flashcards · Economics · by Addaneye

What is a legal monopoly?
A firm with a market share of over 25%
What is a pure monopoly?
Where there is only one firm in the market
Three assumptions when modelling monopolies
There is only one firm Monopolies are profit maximisers High barriers to entry
What are the five barriers to entry?
Legal barriers Sunk costs Internal economies of scale Brand loyalty Anti-competitive practices
What are examples of legal barriers?
Patents Copyrights Trademarks
What are sunk costs?
Costs that cannot be retrieved
What are anti-competitive practices?
Anything a firm might do to reduce or restrict competition
Example of anti-competitive practice
Vertical integration Predatory pricing Price collusion
What type of efficiency do monopolies have?
Dynamic efficiency
What is a natural monopoly?
Where it is naturally most efficient to only have one firm in the market
What two reasons do natural monopolies exist for?
high sunk costs huge internal economies of scale
What is price discrimination?
When a firm charges different groups of consumers different prices, but for the same good
What are the 3 conditions for price discrimination?
Market power Information Limit reselling
What are legal barriers?
They stop in new firms from using the ideas of incumbent firms
Disadvantages of monopolies on consumers
Monopolies profit maximise which leads to a loss in consumer surplus
Advantages of monopolies for consumers
Monopolies can provide cheaper, high quality goods as they can use their supernormal profits to reinvest and access economies of scale
Advantages of monopolies for firms
They are price makers so they can se their prices at Pmax They can lower their costs through dynamic efficiency to drive out competitors, strengthening their monopoly position and gain even greater supernormal profits
Disadvantage of monopolies for firms
decrease in competition >> increase in x-inefficiency >> increase in costs >> losing of monopoly position