Monopoly

• Monopoly definition?

  A firm with over 25% market share- the CMA investigates its behaviour preventing mergers

  A firm with over 40% market share- dominant firm, more laws

  Pure monopoly-100% market share, use for short answer
• Monopoly characteristics?


  Single seller in the market- price maker, demand curve is downward sloping- can change price but accept change in demand or vice versa

  perfect barriers to entry- factors making it difficult for a firm to enter the industry
• Barriers to entry?

  Factors making it difficult or impossible for firms to enter an industry and compete with existing producers

  Marketing barriers

  Legal barriers- patents, gov lisences

  Control of scarce resources

  Very high start up costs. Economies of scale, assymetric information, limit pricing- low to deter entry
• Barriers to exit?

  any obstacle that prevents a firm leaving a market- underevaluation of assets, redundency costs, penalties for leaving contracts early, sunk costs
• Types of barriers to entry?

  Structural- result of the structure of the industry, not deliberately erected by the firm

  Behavioural- the result of direct action by the firm with the intention of preventing market entry.
• SR equilibrium?

  The MR curve lies below the AR curve and falls with increased output.

  AC and MC are u-shaped due to diminishing returns

  Produces at profit maximising at MC=MR

  Must charge Pm from demand curvey

  AC is at c, from AC curve

  Pm-C is profit

  As AR is bigger than AC there ar esupernormal profits
• LR equilibrium?


  Supernormal profits act as signals for market entry, but perfect barriers to entry prevent entry, sp LR output, price and profit remain the same as the SR.

  They could change due to external reasons such as a change in demand or costs
• Monopoly-efficiency?


  they produce at levels that are neither allocatively nor productively efficient.

  Qpiemax= actual output

  AC=MC productive efficiency as AC minimised

  MC-AR allocative efficiency

  As monopolies don't have to keep prices competitive and low costs, innovation and efficiency may be poor, little incentive to innovate
• Monopoly losses?

  Decrease demand= left shift of AR and MR

  increased FC= average cost curve shifts upwards

  Increased V= AC and MC shift up
• natural monopoly?


  A market where even if there was just one firm, not all the benefits from economies of scale could be achived. One monopoly is the most efficient way to produce.

  Due to downward sloping lRAC, so an incrwase in output decreases unit costs
• Characteristics of natural monopolies?

  Some kind of distribution network

  Very high fixed costs (due to setting up distribution network)

  Very high minimum efficient scale- need to sell lots

  Examples: the rail network, gas/ electricity distributors
• Natural monopolies and government ownership?

  Privately owned firms would produce at profit maximising point, but allocative efficiency is where P=MC, but this would cause a firm to make a loss.

  Government owned firms can subsidies losses from tax revenue, in order to maximise social welfare- state ownership