Monopoly & Oligopoly. 3.6 - 3.7

• A monopoly is a market structure with one dominant seller in the market:

  
  

  • Unique product.
  • Price-maker.
  • Barriers to entry.
• Barriers to entry: elements that make it harder for new firms to enter a particular market.
• Types of barriers to entry:

  1. Technology.
  2. Legal barriers.
  3. Patents.
  4. High start-up costs.
  5. Marketing budget.
• Barriers to entry: technology.

  Products that require a high level of technology, make it difficult for new firms to enter the market as they will need to spend a lot of money in research and development of that technology. They may not be able to access the technology needed in that market.
• Legal barriers: these are laws and regulations that limit access to firms into a market.
• Barriers to entry: legal barriers.

  These may be in place to protect consumers, the environment or for health and safety reasons. However, it means less new firms can enter that market and there will be less competition in the market.
• Patents: a form of legal protection of an idea, design or product. Patents allow firms to benefit from their innovation and therefore encourages them to invest in money and research.
• Barriers to entry: patents.

  However, the existence of patents in a market also means new firms will not be able to enter that market as they will not have access to the product or technology.
• Barriers to entry: high start-up costs.

  Some markets require firms to spend a lot of money before starting production because they need a lot of fixed capital (building, machinery, etc.) or technology.
• Marketing budget: refers to the amount of money that a firm uses to advertise its products and create brand loyalty.
• Barriers to entry: marketing budget.

  In some markets, new firms will need to spend a lot of money to be able to compete with the firms that are already inside the markets. This will happen when firms in the market have a strong brand loyalty. This makes it difficult for new firms to enter that market because they may not have that much money to spend on marketing when they start.
• Monopolies have very high barriers to entry. This makes it difficult for new firms to enter the market and it means the monopolist has a lot of power in that market.
• Monopolies can set prices much higher because they're the only ones producing in the market: there's no competition. They are price makers. This is because consumers don't have a choice to buy a substitute if the price is too high. Monopolies sell a unique product.
• Advantages of monopolies:

  1. Efficiency.
  2. Innovation.
  3. Economies of scale.
• Disadvantages of monopolies:

  1. Higher prices.
  2. Restriced choice.
  3. Inefficiency.
  4. Lack of innovation.
• Advantage of monopolies: efficiency.

  Monopolies are able to access resources and expertise to improve their efficiency. This is when the firm minimises average costs without affecting quality.

  For natural monopolies, it is always cheaper to produce if there is only one firm. This means less waste of resources: it's good for the economy as a whole. It could also be good for consumers if the monopolist passes on those lower costs as lower prices.
• Advantage of monopolies: innovation.

  Monopolies have money to invest in research and development in order to create new products and improve the existing ones. Consumers can get better quality products.
• Advantage of monopolies: economies of scale.
• Disadvantage of monopolies: higher prices.

  Monopolies can charge higher prices to consumers. This is because there is no competition, so consumers have no substitutes. Therefore they are forced to pay those prices if they want to but the product.

  The more the product has an inelastic PED, the higher the prices that the monopoly will be able to charge.
• Disadvantage of monopolies: restricted choice.

  Consumers can only buy the product from the monopolist, as there are no substitutes. This reduces consumers' welfare because they can't but products with different characteristics.
• Disadvantage of monopolies: inefficiency.

  A firm is producing inefficiently when it's producing at higher average costs than it needs to. Acheiving lower average costs requires time and effort from managers. They have to search for the cheaper suppliers, improve productivity, etc.
• Disadvantage of monopolies: lack of innovation.

  As there is no competition, monopolies may not have the incentive to innovate. This is because they don't need to improve their products to attract consumers as there are no substitutes. This reduces consumer welfare.
• An oligopoly is a market dominated by a few big firms.

  • Large firms dominate.
  • Different products.
  • Barriers to entry.
• Types of competitions:

  1. Collusion.
  2. Price competition.
  3. Non-price competition.
• Collusion: an agreement between firms in an oligopoly to keep prices above the level they would have if firms were competing.
• If firms collude they will be making more profit than if they compete. Consumers have to pay much higher prices, so collusion is illegal. Firms that collude can receive fines and other sanctions.
• Collusions could be positive if firms used the extra profit to invest in innovation and on improving their product.
• A price war is a situation where firms keep decreasing their prices to push the others out of the market.
• If a firm in an oligopoly decreases their prices, the other firms will do the same. This is because if they don't decrease them, their consumers will go to their competitor selling products at lower prices. This can lead to a price war.
• Firms in oligopolies tend to keep prices stable and quite similar between them to avoid price wars.
• Oligopolies compete using non-price factors.
• Non-price competition includes:

  • Marketing.
  • Creation of brand loyalty.
  • Improvements in quality.
  • Differentiation.
  • Innovation.
  • Better customer service.
• Oligopolists charge higher prices compared to perfect competition, therefore they can use those profits in non-price competition factors. They also have the incentive to attract customers so they don't go to their competitors.
• Consumers pay higher prices in oligopolies than in perfect competition but also have more choices and access to better products and innovation.
• Advantages of oligopolies:

  1. Choice.
  2. Innovation and quality.
  3. Economies of scale.
  4. Price wars.
• Disadvantages of oligopolies:

  1. Higher prices.
  2. Collusion.
  3. Marketing.
  4. Price wars.