Monopolies

• Monopoly


  A market structure that consists of a seller or producer where there are no close substitutes
• Characteristics of a Monopoly

  • One firm dominating the market
  • Different - They have unique products which therefore means firms are price makers
  • High barriers to entry/exit - supernormal profit persist over time for this firm
  • Imperfect Information in market conditions - which keeps firms out from this market
  • Firms are profit maximisers therefore MR = MC
• Pure Monopoly


  • One firm having 100% market share
• Monopoly Power


  • A firm having over 25% of the market share (also known as legal monopoly)
• Economies of scale


  • As firms grow larger, average cost of production falls because of economies of scale therefore having advantage over new firms maintaining their monopoly power and deterring new firms from entering the market
• Limit pricing


  • Existing firms setting prices below production costs of new entrants, ensuring new firms can't enter profitably
• Sunk Costs


  • If unrecoverable costs are high such as advertising they may not enter the market because they can't recover these costs back as can't compete
• Brand Loyalty


  • If consumers are brand loyal and this can be increased with advertising it will be difficult for new firms to obtain market share
• Profit maximisation


  MR = MC
• Average Revenue (AR)


  The demand (demand curve) for the product and because they are price maker the revenue curve is downsloping
• Marginal Revenue (MR)


  The additional revenue gained from selling one more unit
• Average Cost (AC)


  The smile
• Marginal Cost (MC)


  The nike tick and cuts through AC at its lowest point
• MC = MR


  As profit maximiser = Q1
• Q1


  The level of profit monopolist are making
• AR curve


  The price so P1
• Average Revenue is higher than Average Cost


  The vertical distance between the two is the supernormal profit per unit and by multiplying this by Q1 giving the total profit being C1
• C1 - P1 - Q1

  The area of the total normal profit
• There ISN'T allocative efficiency as firms are charging prices which are greater than the marginal cost exploiting consumers (P higher than MC on graph)
• There ISN'T productive efficiency as firms are forgoing economies of scale which is another reason prices are raised
• There ISN'T X-Efficiency, as monopolists produce over AC curve which allows waste to creep in therefore excess costs to the firm
• There IS dynamic efficiency as supernormal profit will be made in the long term with no firms being able to enter the market due to the high barriers of entry and imperfect market information making it difficult to enter and keeping these firms away