Competition policy: Why governments are concerned about monopoly power

Overview

Recall questions on Why governments are concerned about monopoly power and The role of the competition authorities.

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

   Why are governments concerned that monopolies may charge higher prices than firms in competitive markets?

   Model answer

   Monopolies face no competitive pressure, so they can raise prices without losing customers to rivals.

2. 2

   How might monopoly power affect the quantity of goods produced and the range available to consumers?

   Model answer

   Monopolies may restrict output to raise prices and offer fewer product varieties, reducing consumer choice.

3. 3

   What form of inefficiency arises when a monopolist sets price above marginal cost?

   Model answer

   Allocative inefficiency, because resources are not directed to their most valued uses and consumer welfare is reduced.

4. 4

   Explain why monopolies may become productively inefficient over time.

   Model answer

   Without competitive pressure to minimise costs, monopolies lack the incentive to operate at the lowest point on their average cost curve.

5. 5

   Why do governments scrutinise proposed mergers between large firms?

   Model answer

   Mergers may reduce competition and create or strengthen monopoly power, harming consumers through higher prices or lower quality.

6. 6

   Apart from reduced competition, what other negative effects might result from mergers?

   Model answer

   Job losses may occur as the merged firm rationalises operations, and innovation may decline if competitive pressure diminishes.

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