Why governments are concerned about monopoly power

Overview

Monopoly power in a market, allocative inefficiency and deadweight welfare loss in the context of monopoly.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is meant by monopoly power in a market?

   Model answer

   Monopoly power is the ability of a firm to set its own price rather than accept the market price. A firm with a large market share usually holds such power.

2. 2

   Give the main reason a government worries about a firm with monopoly power.

   Model answer

   A monopolist can restrict output and charge a price above marginal cost. Consumers then pay more and buy less than in a competitive market.

3. 3

   What is allocative inefficiency, and why does monopoly cause it?

   Model answer

   Allocative inefficiency occurs when price does not equal marginal cost, so resources do not match consumer preferences. A monopolist prices above marginal cost and so produces below the allocatively efficient output.

4. 4

   Define deadweight welfare loss in the context of monopoly.

   Model answer

   Deadweight welfare loss is the loss of consumer and producer surplus caused by output being held below the efficient level. The lost surplus is not transferred to anyone.

5. 5

   Explain what X-inefficiency is and why monopoly encourages it.

   Model answer

   X-inefficiency means a firm's average costs sit above the lowest attainable level for its output. A monopolist protected from rivals faces little pressure to control those costs. Harvey Leibenstein named the idea in 1966.

6. 6

   How can monopoly power harm suppliers rather than consumers?

   Model answer

   A dominant buyer can force suppliers to accept prices close to their costs. Small suppliers with few alternative buyers have little bargaining strength.

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