Monopolies- lessons 4/5/6

What is a monopoly?

A market situation where there is only one firm in the industry (a single supplier).

What is monopoly power?

When a firm has a large enough market share to influence prices or output.

: What is the UK threshold for monopoly power?

25% market share.

What is the key difference between monopoly and monopoly power?

Monopoly = one firm only; Monopoly power = firm has enough market share to influence the market, even if others exist.

What is price discrimination?

Charging different prices to different groups of consumers for the same product.

What condition makes price discrimination possible?

Different groups of consumers must have different price elasticities of demand (PED).

Which group is charged a higher price in price discrimination?

he group with lower PED (less sensitive to price changes).

What is market skimming?

Charging a high price initially to maximise profit from early buyers, then lowering it later.

What is penetration pricing?

Setting a low price at first to attract customers and increase market share, then raising it later.

What is predatory pricing?

Setting prices very low to drive rivals out of the market.

Why might a firm use predatory pricing?

To eliminate competitors and increase long-term control of the market.

Monopoly characteristics

• There are many small buyers of a product

• -there are no close substitutes for the product

• -the monopolist is a profit maximiser (MR=MC)

• -new firms are restricted from entering the market because of barriers to entry

What is a consumer surplus

The difference between how much buyers are prepared to pay for a good and how much they actually pay

What is a producer surplus

difference between the price that a firm receives from a sale and the price at which they are willing to supply

What are the three main condition necessary for price discrimination

-The monopolist must be able to segment the market into different groups who are willing to pay different prices

-There must be different demand curves for difference groups of buyers- inelastic for those prepared to pay a higher price and elastic for lower price groups.

-The market must be kept separate and prevent consumer switching

WWhat are the ways a monopolist can price discriminate

-It can charge prices at different times of day/week (trains)

-Different prices to different income groups (students)

-Different prices in different locations

What is first degree price discrimination

Where each individual is charged the maximum they are willing to pay… hoowever the cost to find out through market research what each customer is willing to pay and market differently to that customer outweigh the extra revenue gained

What is second degree price discrimination

Firm charges different prices for different quantities consumed. A lower price is charged to full spare capacity

What is third degree price discrimination

Where different prices are charged for the same product to different segments of the market based on age, income etc

Effects of price discrimination on monopolies

-Higher revenues. Higher abnormal profits

-Reduces consumer surplus

-Increases their market share

-Increases economies of scale

-Improves capacity utilisation

-Higher profits- more abnormal profits

-More cross subsidisation of different products or markets

Effects of price discrimination on consumers

-Some can afford products that were previously unaffordable

-Those with most inelastic PEDs pay more

What are some barriers to entry? (9)

-High initial capital costs and expertise

-Exit and sunk costs

-Economies of scale

-Branding and advertising

-Control of a factor of production

Legal protection

-Vertical integration

-Vertical integration

-Aggressive tactics

-Collusion

Go into more detail about the barrier to entry- high initial costs and expertise

Any new firm would struggle to get the funds and afford to hire suitable with the necessary expertise

Go into more detail about the barrier to entry- Exit and sunk costs

Sunk costs are costs which can’t be recovered such as specialises machinery would be difficult to resell. Exit costs might include the costs of getting out of contracts

Go into more detail about the barrier to entry- Economies of scale

Any new entrant to the market is likely to be small and therefore have higher average costs than the established producer, allowing the monopolist to charge at a price below that of the entrant- driving them out of business.

Go into more detail about the barrier to entry- branding and advertising

A monopolist may have such a well-known brand that in order to compete a new entrant would have to spend so much on advertising that it would not be worth entering the market

Go into more detail about the barrier to entry- control of a factor of production

A monopolist may may have access to a key input/ resources (diamonds)

Go into more detail- Legal protection

A monopolist may have a patent which allows it to be the only producer of a specific medicine, or a license may only allow one company to operate in a geographical area

More detail- Vertical integration

Can bring power over supply chain inputs or retail markets.

More detail- aggressive tactics

Monopolist can sustain the losses brought on by a price war for longer than a new entrant- putting them out of business (predatory pricing). Short run profits are reduced in order to maximise long run profit. Monopolists can also use their power to insist on exclusivity deals with suppliers in order to stop new entrants getting access to resources.

more detail- collusion

(more for oligopoly) where firms are tempted to make agreements with one another rather than competing. Involves a number of firms acting as if they were a single firm. In a formal cartel, each firm agrees a quota for the amount it will supply.