A LEVEL monopoly question please help Watch

John123hi
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1) why are motorway service stations have a local monopoly?
2) explain using a monopoly diagram why motorway service station charge higher prices than a supermarket sited off a motorway junction?

thanks plz help I'm really stuck
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(Original post by John123hi)
1) why are motorway service stations have a local monopoly?
2) explain using a monopoly diagram why motorway service station charge higher prices than a supermarket sited off a motorway junction?

thanks plz help I'm really stuck
Service stations have an effective local monopoly as they will be the only provider of that service within a given area. Picture a services on a motorway - there's only ever one supplier, and they're usually every 30-odd miles. It's very hard for other suppliers to enter the market, as the sunk costs of setting up a services are so high. As a result, service stations can be said to have a local monopoly on fuel supply.

For the second part, I assume it expects you to talk about sunk costs (I did my A-Levels a while ago now, so not entirely sure!). The service stations have a local monopoly as discussed, and so can set a higher price without having to sacrifice marginal profit for market share. On the monopoly diagram, this price would be shown as supernormal profit. It may put some people off, but as there is no competition, people in need of petrol will have no choice but to pay the higher price.

In reality, supermarkets charge lower prices as they can subsidise the sunk costs of setting up a petrol station with the supermarket profits. As such, the point at which the marginal and average cost curves cross will be lower. With the same amount of demand, they may charge a lower price relative to the service station, but retain the same supernormal profit.

Hope that helps!

Theo
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John123hi
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(Original post by Herts PG Student Rep)
Service stations have an effective local monopoly as they will be the only provider of that service within a given area. Picture a services on a motorway - there's only ever one supplier, and they're usually every 30-odd miles. It's very hard for other suppliers to enter the market, as the sunk costs of setting up a services are so high. As a result, service stations can be said to have a local monopoly on fuel supply.

For the second part, I assume it expects you to talk about sunk costs (I did my A-Levels a while ago now, so not entirely sure!). The service stations have a local monopoly as discussed, and so can set a higher price without having to sacrifice marginal profit for market share. On the monopoly diagram, this price would be shown as supernormal profit. It may put some people off, but as there is no competition, people in need of petrol will have no choice but to pay the higher price.

In reality, supermarkets charge lower prices as they can subsidise the sunk costs of setting up a petrol station with the supermarket profits. As such, the point at which the marginal and average cost curves cross will be lower. With the same amount of demand, they may charge a lower price relative to the service station, but retain the same supernormal profit.

Hope that helps!

Theo
omg this is so helpful thanks so much! DO you know why Mc donalds at motorway service station might charge higher prices? explani this using price discrimination?
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(Original post by John123hi)
omg this is so helpful thanks so much! DO you know why Mc donalds at motorway service station might charge higher prices? explani this using price discrimination?
I imagine it would be a similar scenario. If a consumer is going to buy some fast food at a services, they don't really have much choice other than the McDonald's. As a result, McDonald's can charge a higher price and eat up some of the customer surplus. I think this is first-degree, but you I would recommend checking your notes on that one!

Theo
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