monopoly

• key characteristics of a monopoly

  high barriers to entry

  dominant firm

  high market share of 1 firm

  price makers
• terms associated with monopoly

  one firm

  large

  high prices

  price maker

  customer exploitation
• unlike perfect competition, monopoly can actually exist

  a pure monopoly is a single supplier that dominates the entire market - the market has 100% concentration e.g. London Underground

  in reality, the UK Competition and Markets Authority (CMA) doesn't just look at 100% of the industry sales
• what market share means that a firm has monopoly power

  more than 25%
• what market share means that a firm is dominant in a market

  more than 40%
• there is a distinction between a firm that is a monopoly and a firm that has monopoly power

  a pure monopolist is more like to be exploitative than a firm with a working monopoly as these often exist in highly competitive oligopolies too
• monopoly power

  • Costa is dominant in a competitive oligopoly
  • Tesco 30% market share
  • Pepsi and Coke dominate in a duopoly
  • Apple >50% market share in the UK
  • google 90% search engine traffic
  • London Underground is close to a pure monopoly

  monopoly
• UK vs Global - mobile phones

  UK:

  iOS 52%

  Android 48%

  Other (<1% combined)

  Global:

  iOS 26%

  Android 73%

  Other (<1% combined)
• UK vs Global - Music Streaming

  UK:

  Spotify 62%

  Global:

  Spotify 35%

  Apple 19%

  Amazon 15%

  Tencent 11%
• Luxottica

  designs/manufactures/distributes about 70% of big-name sunglasses

  2016 39% of market share
• AB InBev

  account for nearly 30% of global beer sales

  they own Stella Artois, Corona, Beck's and Bud light

  headquarters are in Belgium, it is the world's largest beer brewer by both volume and revenue, operating more than 600 beer brands in 150 countries
• characteristics of a monopoly

  usually imperfect information

  no competition

  can use price discrimination

  price making power

  AR>MR

  often high fixed costs

  may involve a network

  firm=market

  barriers to entry and exit

  only 1 firm

  downward sloping demand curve

  can set P or Q but not both
• sources of monopoly power

  economies of scale

  capital requirements

  technical superiority

  no substitute goods

  control of natural resources

  legal barriers
• key issues to thing about when looking at monopoly

  scope/size of the market

  case-by-case basis

  global/regional/national/local?

  industry by segment
• natural monopolies

  national grid

  cable and internet services
• state monopolies

  London Underground

  NHS

  Railtrack in the UK
• local monopolies

  school uniform suppliers

  water supply

  motorway service stations
• economic case against monopolies

  prices are higher than under competitive conditions

  leads to a loss of allocative efficiency (price>MC)

  regressive effects on lower-income households

  absence of genuine market competition may lead to production inefficiencies

  X-inefficiencies such as wasteful production and advertising spending

  higher prices can limit the final output in a market and lead to fewer economies of scale being exploited

  monopoly may get too big - diseconomies of scale

  protected markets - perhaps less drive to innovate
• intervention in monopoly - tax on monopoly profits


  reasoning: a one-off windfall tax on supernormal profits from monopoly power

  evaluation: risk of tax avoidance/loss of capital investment spending
• intervention in monopoly - liberalisation of markets


  reasoning: break up monopolies - allow smaller businesses to enter and increased contestability

  evaluation: smaller businesses may struggle to scale up and compete
• intervention in monopoly - introduce price capping policies


  reasoning: encourages cost efficiencies and increases consumer surplus

  evaluation: monopolists may find revenues in other ways
• intervention in monopoly - nationalisation


  reasoning: take some monopoly utilities back into public ownership

  evaluation: possible loss of productive efficiency
• when answering questions: economic case against monopoly

  SPEW

  Service - does the lack of competition affect the quality of service to consumers?

  Prices - how high are the prices compared to competitive/contestable market

  Efficiency - productive, allocative and dynamic

  Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?
• conduct in a monopoly

  barriers to entry exist - help to maintain supernormal (monopoly) profits in the long run

  imperfect information is assumed

  profit maximisation is assumed b the actual conduct of firms with market power is often different especially in an oligopoly that has a dominant firm

  often firms with market power do not profit maximise as one of their aims is to maintain their market share - e.g. CocaCola in the UK
• economic case for monopoly power

  high market concentration does not always signal absence of competition; can reflect the success of firms in providing better-quality products, more efficiently, than their rivals

  profits used to fund research and development

  natural monopolies - economies of scale

  domestic monopoly faces global competition

  monopoly firms can be regulated i.e. industry regulator acting as a proxy customer

  price discrimination may help some consumers
• monopoly diagram is the same in both the short run and the long run

  AR is the demand curve for a price-making firm (downward sloping)

  MR is always below AR because to sell an additional unit, the price of all units up to that point must also fall

  the shape of AC and MC is the result of the law of diminishing marginal returns

  profit maximisation - MC=MR
• the difference between MC and MR is the marginal profit

  
• monopoly price and output

  the monopoly is a price-maker although it is also constrained by the demand curve

  profit above minimum required to keep firm in business

  
• monopoly and allocative inefficiency

  main case against a monopoly is that it makes higher profits at the expense of a loss of allocative efficiency

  monopolist will seek to extract a price from consumers above the cost of resources used in making the product

  higher prices mean consumers' needs + wants are not satisfied, as products are under-consumed

  higher prices cause loss of consumer surplus and welfare and will disproportionately affect lower income

  
• X-inefficiency in imperfect competition

  
• natural monopoly

  occurs when one large business can supply a market at a lower price that smaller ones, there cannot be more than one productively efficient provider of a good

  exists when there are huge sunk costs, sunk cost is incurred in order to enter the market and cannot be recovered, hence fixed costs are high

  it is an industry where the minimum efficient scale is a large share of market demand, means there are increasing returns to scale at all levels of output, LRAC is falling as LRMC continues to fall, why there is room for only one supplier to fully exploit the economies of scale
• minimum efficient scale (MES) - the scale of output where the internal economies of scale have been fully exploited

  
• natural monopoly

  where there are very high fixed costs involved in supplying a good or service so that the long run average cost curve may fall continuously as output increases in the long run

  
• natural monopoly

  profit maximising output likely to be highly allocatively inefficient as price is above MC + output is restricted

  
• natural monopoly

  monopoly is state-owned and prices capped at MC to increase supply/affordability, losses may be made

  
• how is a natural monopoly different from other industries

  a natural monopoly is a special case where one large business can supply the entire market at a lower unit cost than with multiple providers, due to the nature of costs in a natural monopoly industry, where there's high FC + low MC, FC are enormous but MC of adding on extra user is very low, ATC will continue to fall as extra users are added to the network (internal economy of scale), LRAC may fall across all ranges of output, only one firm might reach the minimum efficient scale
• deadweight loss of welfare caused by monopoly

  
• the effect of elasticity on a monopoly's profit

  
• price discrimination

  the practice of charging different prices to different customers for the same product

  a monopoly can engage in price discrimination when it can identify different types of customers with different willingness to pay, price variations do not fully reflect the marginal cost of supplying a product e.g. higher costs for parcels delivered over short and long-haul distances in the UK and overseas

  can increase economic efficiency by allowing the monopoly to sell more output at a lower average cost

  not the same as product differentiation
• 1st degree (perfect) discrimination

  charging different prices for each individual unit purchased - people pay their own individual willingness to pay