3.4.5 - Monopoly

• Monopolies can be characterised by:

  • Profit maximisation.
  • Sole seller in a market (a pure monopoly)
  • High barriers to entry
  • Price maker
  • Price discrimination
• Third degree price discrimination is when monopolists charge different prices to different groups for the same good or service
• In order for price discrimination to occur: the firm must be able to clearly separate the market into groups of buyers; the customers must have different elasticities of demand; and they must be able to control supply and prevent buyers from the expensive market from buying in the cheaper market.
• This shows that by price discriminating and having two separate markets, the inelastic market and the elastic market, rather than a combined market, the firm can make higher profits

  
• A pure monopoly exists where one firm is a sole seller of a product in a market.
• The legal definition of a monopoly is a market share of 25% or above
• Impact on consumers

  • Consumers may face higher prices as there is less competition
  • Limited choice
  • A reduction in consumer surplus.
• Impact on firms

  • Monopolies can have significant profit in the long run
  • But can risk government intervention.
• Impact on employees

  • Monopoly is may offer job security but can also reduce competition in labour market, potentially impacting wages.
• Impact on suppliers

  • Suppliers may have limited bargaining power and face pressure to offer lower prices
• Disadvantages of monopolies for consumers

  • Monopolies produce at the profit maximisation point, which leads to a loss and consumer surplus. Whereas firms in perfect competition producer alloctive efficiency, which means that consumer surplus is maximised. As a result, consumers are worse off in monopolies.
• Barriers to enter

  1. Legal barriers
  2. Sunk costs
  3. Economies of scale
  4. Brand loyalty
  5. Anti competitive practices
• A legal Legal barriers include any patents, copyrights or trademarks that stop new firms using the ideas of an incumbent firm, a firm already in the market.
• With sunk costs, however, the money can't be recovered if a firm leaves the market
• monopoly diagram

  
• Monopolies are productively ineffiinefficient as they are producibg at AC = MC
• Monopoly efficiency

  • Productively inefficient
  • Allocativelt inefficient
  • X-inefficiency
  • Dynamic efficiency depends on the owner