Market Economy MCQ 3 (monopoly)

Monopoly Characteristics

• Single Seller: A monopoly is characterized by a single firm that dominates the entire industry, with no close substitutes available in the market.
• Profit Maximization: The monopoly firm aims to maximize its profits by producing a quantity where Marginal Revenue (MR) equals Marginal Cost (MC), with MC cutting MR from below.
• Law of Demand: The monopoly firm is subject to the Law of Demand, which means it can either set its price or quantity, but not both simultaneously.
• Barriers to Entry: The existence of barriers to entry, such as patents, copyrights, high start-up costs, economies of scale, or sole access to raw materials, prevents new firms from entering the industry or market.
• Inefficient Operations: Monopoly firms can operate inefficiently, failing to produce at the lowest point on the Average Cost (AC) curve, leading to a mismatch between production and cost minimization.

Price Discrimination

• Price discrimination involves charging different customers different prices for the same good/service, without difference in cost of production.

Types of Price Discrimination

• First Degree Price Discrimination: Elimination of consumer surplus, where the seller knows the maximum price each consumer is willing to pay, e.g. a solicitor providing legal advice to a client.

• Second Degree Price Discrimination: Giving discounts to those who buy in bulk, where the seller is aware of the Law of Diminishing Marginal Utility.

• Third Degree Price Discrimination: Charging different prices based on the characteristics of the consumer, e.g. a hairdresser charging a lower price for students (who are relatively price elastic).

Conditions Necessary for Price Discrimination

• Monopoly Power: The seller must have monopoly power in the market.

• Identify Groups with Different PEDs: The seller must be able to identify groups of consumers with different Price Elasticity of Demand (PED).

• Keep Markets Separate: The seller must be able to keep the markets separate to prevent reselling.

• Consumer Indifference: Consumers must not care to pay a higher price, they must be indifferent to the price difference.

Market Concentration

• A highly concentrated market is characterized by a small number of large firms holding a large percentage of market share.
• The smaller the number of firms, the more concentrated the market, leading to increased competitiveness.

Regulation of Monopolies

• Addressing customer complaints
• Approving or rejecting price increase requests from firms
• Conducting inspections
• Prosecuting firms for breaching regulations

Monopoly Advantages

• Benefit from economies of scale due to large size
• Access to substantial capital for R&D and other purposes
• Job security for employees due to lack of competition
• No duplication of services

Monopoly Disadvantages

• Can be inefficient and wasteful of resources
• Lack of incentive for innovation and creativity due to no competition
• May exploit consumers to achieve supernormal profits
• Taxpayer subsidies required for loss-making state monopolies

Test your knowledge of the characteristics of a monopoly, including the single seller, profit maximization, and barriers to entry.