Monopolies

• Monopoly characteristics

  ·  The only firm in the industry (100% market share) but in law a monopoly is when a market share of 25% or more.

  ·  High barriers to entry to prevent new firms entering the market

  ·  Short run profit maximiser
• Price discrimination is where a seller charges different prices to different buyers for the exact same product or service.
• ·       Market power – the firm must have the ability to change the price (monopoly)

  ·       Information – the firm has to be able to distinguish between customer’s willingness to pay. For example, a tram service would know that the Manchester to London morning route will have price inelastic demand.

  ·       Limited ability to resell – customers cannot resell the product – this is because they would purchase the good at the lower price and sell at the higher price. When they sell at the higher prices, the supply will increase and the actual price level will end up falling.
• First degree price discrimination is where each customer is charged the maximum they would be willing to pay. This would turn all of the consumer surpluses in to extra revenue for the seller. However, this method is very difficult to put into practice because of the difficulties in collecting information and preventing reselling.
• Second degree price discrimination is where lower prices are charged to people who buy large quantities of goods. This encourages large orders and turns some consumer surpluses in to extra revenue if they do not buy in bulk (because they will be charged a higher price).
• Supernormal profits

  • Allow firms to finance investments and maintain their competitive edge
  • Allow firms to keep reserves for financial difficulties
  • Allow firms to fund research and development
• Price discrimination


  • May rise total revenue to a point that allows survival of a product or service
  • For example, economy class flights are funded by those flying business and first class
• Monopolies


  • Can take advantage of economies of scale to lower average costs
  • Costs are still often lower than the productively efficient level of a small firm
• Cross-subsidisation


  • Where a firm funds its own goods from profits of its other goods
  • May lead to an increased range of goods or services available to consumers
• Disadvantages of Monopoly power

  • Supernormal profit also means there is less incentive to be efficient (productive and X) and to develop new products
  • All efforts may be directed into protecting their market dominance
• Monopoly power


  Can lead to higher prices and lower output for consumers
• Monopolists


  Can discriminate on price to reduce consumer surplus and raise producer surplus for their own personal benefits
• There are few permanent monopolies
• Supernormal profits


  Act as an incentive to break down the monopoly through 'creative destruction' – innovation and product development
• Patents on a monopoly's products can also run out
• Monopolies

  Lead to a misallocation of resources as they set prices above marginal costs, meaning the price is above the opportunity cost of providing the good
• Natural monopoly


  A type of monopoly that exists as a result of the high fixed costs or start-up costs of operating a business in a specific industry
• Natural monopolies

  • Can exist when the materials needed to supply their product are unique
  • Can exist when the technology needed to operate is unobtainable to any other firm
  • Economies of scale are often so large that new entrants would also find it impossible to match the costs and prices of the monopoly
• Barriers to entry


  Reasons why monopolies maintain their position as the sole supplier
• Barriers to entry

  • Legal barriers (patents)
  • Marketing barriers (advertising)
  • Access to specific materials
• Water companies

  • No substitutes for their products
  • Their supply chain is unique (they would own all of the water pipes into each house)
• Railway companies

  • Owning the railway tracks