3.4.5 Monopoly

• Legal Monopolies


  Firms with a 25% or more market share
• Pure Monopoly


  Firms that have a 100% market share
• Natural Monopoly


  Markets where the most efficient number of firms is one
• Problems with Monopolies

  • Higher prices due to monopoly power
  • Allocatively, productively and potentially x-inefficient
  • High SNP leads to an unequal distribution of income
  • Monopoly may have monopsony power and pay lower prices to suppliers
  • Lack of incentives to have better quality or be more innovative reduces choice and lowers living standards
• Advantages of Monopolies

  • Industry may be a natural monopoly
  • Significant economies of scale so can pass on lower prices to consumers
  • High SNP can be used for R&D e.g. pharmaceuticals
  • Firm may still face global competition
• Evaluation of Monopolies

  • Some industries require or benefit from being a monopoly e.g Pfizer or Thames Water
  • Governments can regulate monopolies to minimise externalities
  • Governments are susceptible to regulatory capture and corruption so policies may be ineffective
  • Government lacks perfect knowledge
• Natural Monopoly

  When there are very high barriers to entry and fixed costs thus the most efficient number of firms in the market is 1
• Why do the LRAC and LRMC slope downward?


  High barriers to entry lead to incredibly low costs as it is impossible for one firm to exploit economies of scale

  
• Third Degree Price Discrimination


  When a firm charges different prices to different groups of consumers based on their PED and YED
• Why are prices higher for those who bought same-day tickets?

  Those who bought same-day tickets are price inelastic as they have less time to find a substitute and may need the ticket so they are charged more

  
• Conditions for Price Discrimination


  • Ability to set prices/ a degree of monopoly power
  • Ability to segment consumers e.g. requiring ID for sales
  • Prevention of arbitrage
• Benefits of Price Discrimination

  • Benefits some groups of people e.g. student discounts
  • Increased profitability increases investment and quality
  • Ration demand and prevent congestion e.g. peak and off-peak charges
  • Firms can stay in the market and remain profitable
• Costs of Price Discrimination


  • Some groups may pay a higher price
  • Decline in the consumer surplus
  • Administrative costs associated with preventing arbitrage
  • Can be seen as unfair so may lose customers