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Economics ­ Theory of Monopoly (12/9/12)

Theory of Monopoly
Definition = One firm makes up the total market and no other firms are able to enter the

The firm is the `industry' ­ this one firm produces the whole output of the industry
Barriers to entry ­ No other…

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Natural Monopoly:

Competition would be inefficient as it would increase costs
Example: Railways (competing rail lines would amplify costs and use scarce
resources, land, inefficiently)

Characteristics of Natural Monopolies:

Extremely high capital cost to set up
Duplication is unnecessary & wasteful
Minimum Efficient Scale does not occur until extremely high…

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Are not productively or Allocatively efficient ­ no incentive to do so; no threat of a
new entrant undercutting (they may chose to be Allocatively efficient though)
Often achieve dynamic efficiency ­ they have an incentive to innovate as there is no
perfect knowledge

Price Discrimination:

Both Monopolists & Oligopolists…

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Examples = Electricity, Mobile Phones, Gas

Third Degree:

The same product or service is sold at different prices to different consumers
Consumers are split into different groupings based on; income, location, time, age
Examples = Train Fares, Cinema Tickets


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