Monopoly

• A pure monopoly exists when there is only one firm in a market
• A legal monopoly exists when there is one firm in the market with over 25% market share
• Characteristics of a monopoly:

  • Economists' model for a monopoly assumes there is one dominant firm in the market
  • High barriers to entry and exit due to legal barriers, high levels of sunk costs, internal economies of scale and brand loyalty
  • Monopolies are usually profit maximisers
• Monopolies produce outcomes that are allocative inefficient as they exploit customers, they are also productively inefficient
• Monopolies can also be X-Inefficient as they may become complacent in the production process
• Monopolies however can become dynamically efficient since supernormal profit may be made in the long run
• Monopoly evaluation:

  
  

  • Monopolies are heavily regulated
  • Supernormal profit may not be used for reinvestment
  • Profit maximisation may not be the objective of all monopolies
  • Monopolies don't mean there isn't any competition
  • Natural monopolies would mean one firm SHOULD exist only
  • The diseconomies/economies of scale arguments are significant however the monopolists' production on the average cost curve is the determinant of what argument holds
• A natural monopoly occurs when it's naturally most efficient for there to be only one firm in the market, they will experience huge internal economies of scale and so it makes no sense for any firms to compete