3.4.5 Monopoly

• Monopoly:

  The market structure with the least competition. It has the following features:

  -One firm selling a unique product

  -High barriers to entry

  -Profit maximising
• Difference between a monopoly and monopoly power

  A firm is a monopoly if it is the only firm in an industry.

  However, a firm is said to have monopoly power (AKA market power) if it reaches a market share of 25% and therefore has a dominant position in the market.
• What is the equilibrium in a monopoly market structure?

  Monopolists face a downward sloping demand curve. They produce an output where MC=MR. They are able to make SNP as high barriers to entry prevents new firms joining the market.

  They are both allocatively inefficient (P>MC) and productively inefficient (don't produce a Q at the lowest point of AC).
• Price discrimination:


  When a firm charges different prices for the same good or service in different markets.

  E.g. cinemas charging different prices for adult and student tickets.
• Different ways a monopolist can price discriminate:

  -Time. E.g. rail companies charging a higher price at peak times

  -Place. E.g. charging a different price for the same product in different countries

  -Income. E.g. charging lower prices for children/students/pensioners.
• Conditions that need to be in place for price discrimination to occur

  -Firm must have market power - The firm needs to be a price maker in order to have the ability to vary prices.

  -The firm must be able to split customers into groups with different PEDs.

  -Must be possible to split the market at relatively low cost - It must not be possible for all customers to buy at the low price.
• How do firms benefit from price discrimination?

  -Firms will charge a high price to the groups of customers with inelastic PED. Higher price -> smaller % fall in Qd -> higher rev

  -Firms will charge a lower price to the group of customers with elastic PED. Lower price -> larger % increase in Qd -> higher rev

  -Using price discrimination will result in higher revenue (+profit) compared to charging all consumers the same price.
• Adv (+) and disadv (-) of price discrimination for firms

  (+) Higher revenue and profit

  (-) May be some costs involved in keeping markets separate
• Adv (+) and disadv (-) of price discrimination for consumers

  (+) Some consumers benefit from lower prices (often low income consumers) -> higher consumer surplus

  (-) Some consumers lose out through higher prices -> lower consumer surplus
• Natural monopoly:


  Occurs when the economies of scale in an industry are so great that it is most efficient for the market to be supplied by a single firm.

  E.g. network rail (trail tracks & stations) and the national grid (electricity generation and distribution).
• Local monopoly:


  When a firm has a monopoly in a small geographical area. E.g. a petrol station in a small town.
• Adv (+) of a monopoly market structure:

  -Monopolists are likely to be large firms producing a large quantity of output -> can benefit from economies of scale -> lower unit cost (improved productive eff) -> potentially lower prices for consumers. This is esp true if the firm is a natural monopoly.

  -Monopolists make SNP -> can invest in R&D -> this can either lead to improved products for consumers (improved allocative eff) OR it can lead to improved production processes which reduce AC (improve productive eff). These improvements in static efficiency over time -> dynamic efficiency.

  -Monopolists may be able to effectively compete with foreign competition.

  -Monopolists can price discriminate which has some advantages.
• Disadv (-) of a monopoly market structure:

  -Market power (due to having no competition and high barriers to entry) -> higher prices -> allocative inefficiency (P>MC) -> lower consumer surplus.

  -Restricts output to keep prices high and maximise profits -> doesn't produce at the lowest point of AC -> not productively efficient.

  -Due to lack of competition -> monopolists have no incentive to be efficient -> high likelihood of X-inefficiency -> higher AC -> potentially higher prices.

  -Lack of competition -> no incentive to use SNP to invest in new products/improved production processes.

  -Can use price discrimination -> some disadvantages.
• What does the impact of a monopoly market structure depend on?

  -Public/private sector monopoly. A public sector monopoly is unlikely to have profit max as an objective -> lower prices

  -Natural monopoly or not -> if it is then it may be most efficient market structure as it can fully exploit EoS

  -Whether the monopoly is well regulated by govt -> if yes, they may not be able to exploit consumers with higher prices

  -Degree of contestability -> if market is fairly contestable then the monopolist may keep prices low to avoid attracting new entrants

  -Nature of the product being sold -> monopolies are more harmful to consumers if they sell necessities.