Monopoly Market Structure Flashcards
What Is A Monopoly?
A market structure where one firm dominates the production and sale of a product due to entry barriers which prevent new firms from entering the market.
What Are Types Of Monopoly?
- Pure monopoly - Only one firm in the market.
- Legal monopoly - One firm dominates the market e.g. firms with 25% of the market share UK and EU.
What Are Assumptions/Characteristics Of A Monopoly?
One dominant producer.
Unique product.
Entry and exit barriers.
The firm is a price setter
The demand (AR) curve is downward-sloping.
What Are Sources Of Monopoly (Barriers To Entry) ?
High start-up costs.Where a heavy capital investment is required to enter a particular market in order to
achieve the minimum efficient level of scale, it will be difficult for new firms to enter the industry. These high costs may not be easy to recoup if the firm has to exit the market. These high exit costs may reduce the likelihood of new firms to enter the market.
Control of supply of inputs. This can enable the firm to acquire monopoly power in the market. OPEC controls over 40% of the global oil production and over 80% of the world’s oil reserves. It has monopoly
over oil supply.
Economies of scale. When firms in the market experience economies of scale they will produce at lower unit costs. They could charge low prices which new entrants cannot compete.
Brand loyalty. It could create and sustain a monopoly if the brand becomes identified with a product e.g. Coca-Cola with cola drinks.
Copyright and patents. They guarantee sole rights to producers over new inventions, processes and intellectual property. This could prevent other firms from entering the market. Microsoft enjoys such
rights in the area of computer operating systems and software.
Legal protection. Laws and legislations may create a monopoly. In many countries public utilities like water,
postal services are given monopoly status by the government. Governments may also give exclusive rights to producers e.g. broadcasting licenses for commercial TV companies. These rights make it difficult for new firms to enter the market.
Mergers and takeovers. A firm could become a monopoly in a market by taking over other companies in the industry. This increases its market share.
What Is The Equilibrium In A Monopoly Market Structure?
