Question

1. How do barriers to entry benefit a monopoly?

2. What benefit does society derive by allowing some monopolies to be created?

3. Why might an airline company (assuming it is a monopoly) charge different fares to different groups of customers?

Answer 1

1. Barriers to entry refer to a situation or law when the monopoly firm is given the assurance that by law no other firm can enter the market and thus the monopolist can operate with full confidence and thus with higher efficiency because it is assured that it will retain its monopoly status.

2. In cadse of industries in which there are high fixed costs but negligible variable costs such as electricity then in such cases if there is monopoly then once the firm is set up it can produce additional units at low cost and hence low price and thus society benefits from it.

3. This charging of different fares from different groups of consumer is called third degree price discrimination. This is profirable when the different groups of consumers have different price elasticity of demand. Since students have high elasticity so if they are charged higher fares then they will not travel by air and thus for them prices should be set lower compared to business people.