1.5.6 Monopoly and monopoly power Flashcards
pure monopoly
the sole seller in a market
Monopoly power percentage
25% or more. e.g. Google = 90% of market.
Monopoly power is influenced by factors like:
- Barriers to entry
- no. of competitors.
- advertising.
- degree of product differentiation.
Factors influencing monopoly power
The number of competitors
Fewer no. of firms, lower the
barriers to entry, and the harder it is to gain a large market share.
Factors influencing monopoly power
Advertising
can increase consumer loyalty, making demand price inelastic, and creating a barrier to entry.
Factors influencing monopoly power
The degree of product differentiation
The more the product can be
differentiated, through quality, pricing and branding, the easier it is to gain
market share. - the more unique the product seems, the fewer
competitors the firm faces.
What stops an industry becoming a pure monopoly?
- pure monopoly might have their legal monopoly taken away e.g. the Royal Mail lost their monopoly in parcels and letters delivery.
- Competition authorities might find other ways to inject competition e.g. access operators in the UK rail industry
- Technological change creates new substitute products and competitors and helps to bring entry barriers down
- Most industries are contestable to a degree – there is always the threat of potential rivals
key features of a business having monopoly power in one or more markets?
- Price setting power including the option of using price discrimination.
- Ability to harness barriers to entry to maintain supernormal profits in the long run.
- Market power depends on the structural characteristics of the industry.
- Even firms with a lot of market power might need to consider the threat of potential rivals.
Monopolistic comp main characteristics
- large no of producers
- simular products that differenciate from one another.
- barriers to entry and exit are relatively.
SR monopoly
- downward sloping demand curve.
- maximises profit where MC = MR.
- SR = individual firm is able to smake supernormal profit.
LR monopoly
- will only make normal profit.
- low entry barriers - can join industry easily and attract SNP’s.
- effect of this - reduced demand (D=AR) as new entrants take some of market share.
- = D=AR curve is just tangential to firm’s ATC curve, meaning normal profits made at profit maximising output.
Assumptions of a monopoly
- imperfect knowledge.
- no close substitutes.
- no firm with total market share.
- high barriers to entry and exit.
- price makers.
Sales maximisation is where…
AC=AR
revenue maximisation is where…
MR = 0
How to moniter/control a monopoly?
- regulations and legislation.
- trade liberalisation
- nationalisation
Advantages
- economies of scale = a proportionate saving in costs gained by an increased level of production.
- abnormal profits used for R&D.
Disadvantages
- welfare loss and inefficuency.
- no incentive to control costs.
- lack of choice.
Good case - for
- can be productively efficient.
- dynamic efficiency = have the resources to invest in new tech and products, - drive down costs LR concept.
- Joseph Schumpeter - Austrian economist “only the secure can afford to be renturesome”
- Economies of scale.
- price stability.
Bad case - against
- prices higher than comp level - consumers exploited.
- output lower than comp level - societies resources misallocatied, underproduction.
- not allocatively efficient = doesn’t produce where S=D.
- not productivly efficient = doesn’t produce on lowest point of AC.
- limited choice, lack of variety.
- customer service issues.
- x inefficency = big companies - organisational slack.
- statically ineffiucent = SR concept, at point in time allocative and productive inefficent.
Factors influencing monopoly power
Barriers to entry
The higher the barriers to entry, the easier it is for firms to
maintain monopoly power.
Examples of barriers to entry
- Economies of scale
- Limit pricing
- Owning a resource
- Sunk costs.
- Brand loyalty.
- Set up costs.
- Legal and technical barriers
