Monopoly, Monopoly Power and Contestable/NonContestable

• A pure monopoly has 100 % market share
• A working monopoly has 25 % plus market share
• A dominant monopoly has a 40 % plus market share
• An example of a dominant monopoly is Google in the search engine industry
• A natural monopoly can occur due to very high fixed costs meaning a very high output is required, meaning a large market share is need to decrease average costs. This limits the number of firms that can be in the industry
• ,A statuary monopoly is one imposed by the government, eg. Nationalisation
• Monopoly power can be formed by multiple firms merging. However sometimes this is restricted by the CMA - Competition and Markets Authority.
• Monopoly power can also form due to patents, if only one company has the patent for the product, then only they can produces it.
• A Monopoly has a sloped demand curve, meaning it has price setting power
• Monopolies can be shown to display bad conduct in a Schumpeterian Sense
• A monopoly makes supernormal profits when they profit maximise because AR > AC. This. means that they reduce consumer welfare - Welfare Diagram.
• A monopoly is not allocatively efficient because P does not equal MC. It is not productively efficient because it does not produce at the minimum of the AC. Therefore a monopoly is not statically effecienct.

  
• A monopoly makes super normal profits, meaning it could dynamically efficient. This means it could reduce its long run average cost, so the price to the consumer could decrease. However, the firm could also choose to just keep the price the same, so the consumer would not benefit and they would make more supernormal profit.
• A monopoly reduces the maximum number of trade it can make to increase profit, therefore there will be a dead weight loss triangle, which has a negative effect on society as no utility can be gained from those trades.
• The effect on consumer and producer surplus can be shown in the Welfare Diagram. I
• Baumol suggested that monopolies will not always engage in bad conduct is the market is contestable. If the industry has 'no sunk costs' (no entry / exit costs) it will prevent a monopoly from becoming complacent as another firm could enter and take their market share. Firms have to keep their costs low, so they can offer a low price, so stay in the industry.
• Monopolies can have better conduct if there is a threat of entry by new firms
• Monopiles can choose to limit price (AC = AR) to keep market share in a contestable market. If there are no supernormal profits, there is not insentive for new firms to join the industry
• A natural monopoly arises when there are economies of scale over a relevant range of output
• Water is an example of a natural monopoly. There is high cost due to the need of infrastructure, meaning there has to be a high output to reduce these costs
• One barrier to entry is economies of scale where there need to be a high output to reduce average costs
• One barrier to entry is brand (consumer) loyalty meaning consumers are inelastic, so are not likely to switch to a different producers.
• One barrier to entry is legal reasons such as franchises, patents, trademarks and import controls (tariffs and quotas).
• One barrier to entry is limit pricing from existing firms
• One barrier to entry is brand proliferation. This is where an existing firm saturates the market with their market so there is no space for new firms to enter the market.
• Barriers to Entry for a Monopoly:

  • Economies of Scale
  • Brand Loyalty
  • Legal
  • Limit Pricing
  • Brand Proliferation
• One advantages of a monopoly is that if it is government owned, its aim is not always to profit maximise. It could aim to increase employment or use subsidies so a better price for consumers. However, there will be opportunity costs as the government will have to generate more money to fund this, or remove funding from else where.
• One advantage of a monopoly is that the firm can use supernormal profit to invest in R n D - dynamic efficiency. This could decrease the price for consumers. However, the firm could choose not to decrease price and increase their profit. If the demand is inelastic, then the consumer will pay no matter what the cost
• If the market is contestable, the firm may choose to limit price, to increase market share. This offers a lower price to consumers. However it can be bad for new firms trying to enter the market.
• One advantage of a monopoly is that the firm can take advantage of economies of scales, meaning they can offer a lower price to consumers.
• One disadvantage of monopolies is that they are usually their due to high barriers to entry, meaning they are not contestable, so incumbent firms can exploit their monopoly power and do not have to limit price
• One disadvantage of a monopoly is that they waste scarce resources because they are not productively and allocatively efficient
• During the cost of living crises, Shell has the highest profits in 150 years
• One disadvantage of a monopoly is that they remove consumer surplus because price is greater then marginal costs
• When looking at a monopoly consider: conduct (profit), performance (efficiency) and welfare (surplus and dead weight loss triangles)