monopoly and monopoly power

• what is a monopoly?

  single seller

  no substitute products

  complete market power and is able to set prices and control output

  • This allows the firm to maximise supernormal profit in the short-run
  • There is no long-run erosion of supernormal profit as competitors are unable to enter the industry
  • High barriers to entry exist
  • One of the main barriers is the ability of the monopoly to prevent any competition from entering the market
  • E.g. By purchasing companies who are a potential threat
• what does the UK competitiion and Markets Authority define a monopoly as?

  any firm having more than 25% market share

  • It acts to prevent this from happening in most industries
• if a firm is a single seller of goods in a monopoly market what does it mean?

  it is also the entire market. it is a price maker which means its revenue curves are downward sloping.
• what does this graph show about a monopoly at profit maximising equilibrium?

  • The firm produces at the profit maximisation level of output, where MC = MR (Q1)
  • At this level, AR (P1) > AC (C1)
  • The firm is making supernormal profit (P1 - C1) x Q1

  
• what happens when the competition and markets authority try to limit authority power?

   firms have taken the Regulator to court in an attempt to convince them that the firms market power will benefit consumers

  • Theoretically, this is possible. However, in many cases the desire to maximise profits would prevent this from happening
• what is the advantage of a firm being a stakeholder in monopoly power?

  • Supernormal profits generate money for continued investment in technology and product innovation
  • Market power enables the firm to increase its global competitiveness
  • Economies of scale can increase, thereby lowering the average cost
  • Producer surplus increases
  • Price discrimination can increase revenue
• what is the disadvantage of a firm being a stakeholder in monopoly power?

  • Due to a lack of competition, there is a reduced incentive to be efficient
  • Cross subsidisation can create inefficiencies
  • Monopolies lead to a misallocation of resources as P > MC. The price is above the opportunity cost of providing the goods
  • Due to a lack of competition, innovation sometimes lacks effectiveness 
• what is the advantage of an employee being a stakeholder in monopoly power?

  • Supernormal profits often result in higher wages
• what is the disadvantage of an employee being a stakeholder in monopoly power?

  • Having only one supplier in the industry limits the opportunity to change employers
• what is the advantage of a consumer being a stakeholder in monopoly power?

  • Product innovation due to the firm's supernormal profits may result in a better-quality product
  • Cross subsidisation can lower prices on some products that the firm provides
  • Prices may fall If firms pass on their cost savings (due to economies of scale) in the form of lower product prices
• what is the disadvantage of a consumer being a stakeholder in monopoly power?

  • A lack of competition is likely to result in higher prices as no substitute goods are available
  • A lack of competition may result in no product innovation &
  • worse product quality over time
  • May experience worse customer service as the incentive to improve it is limited
  • Cross subsidisation is likely to increase prices on some products offered by the firm e.g. Champagne prices
  • Consumer surplus decreases
• what is the advantage of a supplier being a stakeholder in monopoly power?

  • Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally
• what is the disadvantage of a supplier being a stakeholder in monopoly power?

  • There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers (monopsony power)
  • This price may not be profitable in the long run
• what is cross subsidisation?

  using the profit generated by one product to lower the price of another