Monopoly

• Monopoly (legal monopoly): one firm dominates over 25% of the market share
• Pure monopoly - one firm dominates 100% of the market share
• Monopoly competition characteristics:

  • finite buys + sellers
  • differentiated goods
  • firms are price makers/ profit maximisers
  • High barriers of entry into market
  • imperfect information
• Monopoly produce at MR = MC

  • allocative inefficient
• Firms do not operate at the lowest point of the AC curve:

  • Productive inefficient
• Firms do not operate on the AC curve:

  • X inefficent
• Firms produce Supernormal profits:

  • Dynamic efficiency
• Goods produced by monopoly firms are price inelastic
• Firms take advantage of the imperfect knowledge about substitutes or costs of producing goods by increasing prices
• Cons:

  • Firms are not static efficient (Allocative, productive, X)
  • No comp, no incentive for Dynamic efficiency ----> higher dividends instead
  • Internal Diseconomies of Scale
  • Reduced consumer surplus
• Pros:

  • Firms can cross subsidise
  • More EoS than Perfect Markets
  • Boosts economy competitiveness
  • supernormal profits --> Dynamic efficiency ---> cheaper prices for consumers
• Creative destruction - When monopoly firms are so big they become complacent and another firm replaces them with innovative products
• Natural Monopoly - a market with only one dominant firm as sunk costs are so high average costs are always falling
• Pros of Natural Monopoly:

  • Economies of scale
  • X efficiency
• Cons of a Natural Monopoly:

  • High sunk costs
  • poor quality/ customer service issues - lack of competition