Monopolies

• The characteristics of a monopoly’s market are:

  1. there is 1 firm in the market
  2. the product is unique
  3. there is inperfect knowledge
  4. the barriers to entry and exist are very high
  5. they are price makers
• Sunk costs are the money spent on marketing, research or specific capital with little resale value cannot be recovered if the firm decided to leave the industry
• Monopolies benefit from economies if scale. Lower long-run average costs will allow a firm to keep prices low and so deter entry as new entrants may not be able to keep prices as low and make supernormal profits
• Legal barriers such as patents, copyrights, government licenses and public franchises can all prevent other firms joining the market
• Consumer have brand loyalty towards a particular product and so their demand is price inelastic and new firms trying to enter the market must advertise heavily and successfully in order to gain market share
• A monopoly is neither productively or allocatively efficient
• A pure monoploy is where there is only 1 firm in the market
• Monopoly power is where a firm has the ability to behave without competitive pressure. They have around 25% market share
• Where would these points occur:

  1. profit maximising (MC=MR)
  2. revenue maximising (MR=0)
  3. allocative efficiency (MC=AR)
  4. productive efficiency (bottom of the AC curve)
  5. breaking even (AR=AC)
• Economies of scale is when average cost falls as output increases
• The minimum efficiency scale is the smallest level of output that will achieve lowest average costs
• A natural monopoly is where there is only one firm in the market due to high costs, a high Minimum efficient scale and limited demand