Pure Monopoly
8 important questions on Pure Monopoly
What are four characteristics of a pure monopoly?
- A single seller of the good or service
- No close substitutes of that good or service
- The monopolist is the price maker
- Blocked entry to the market
Name four barries to entry to a market, that enable a firm to operate as a monopoly?
- Economies of scale may be so great that only one (or few) firm (s) can afford to achieve the efficient scale.
- Legal barriers, so patents, licences
- Ownership or control of essential resources
- Pricing and other strategies
Is the demand curve for a monopolist perfectly elastic (horizontal) or not (sloping downwards)? Why?
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What are two implications of the monopolist's demand curve?
- The marginal revenue is less than the price, because the price set higher means that the extra profit per higher priced units is lost. Monopolists could have overpriced three units, and sold them at a higher price, but instead chose to sell 5 at a lower price, to make more profit. This means selling all units between 3 and 5 at a lower price to: the marginal revenue decreases, along with the price. It stays lower.
- The monopolist is the price maker.
What are three misconceptions concerning the monopolist' behaviour?
- Monopolists do not always charge the highest price. Often, it is more beneficial to sell more at a lower price
- Monopolists seek maximum total profit, not maximum unit profit.
- Monopolists are more likely to make and maintain economic profit on top of normal
profit (included in the costs) but they can also make losses, due to
lack of demand and high costs.
What are the 4 effects of monopoly?
- The output is organized in such a way that the prices are higher, and the market yields neither allocative nor productive efficiency.
- Prices are higher, exceeding both MC and ATC
- Monopoly increases income inequality
- C0sts are different in a monopolistic economy
How do costs differ in a monopolistic economy?
- Economies of scale may not be fully exhausted.
- X-inefficiency: production at a higher than possible cost.
- Rent-seeking behaviour
- Less technological advance
What are the requirements for price discrimination? (3)
- Monopoly power to control output and price
- Market segregation - the buyers must somehow be put in different classes
- No resale
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