monopoly-and-monopoly-power

课 Progress

0% Complete

Characteristics of Monopoly

A monopoly is a market structure in which there is a single seller
There are no substitute products
The firm has complete market power and is able to set prices and control output
- This allows the firm to maximise supernormal profit in the short-run
- There is no long-run erosion of supernormal profit as competitors are unable to enter the industry
High barriers to entry exist
- One of the main barriers is the ability of the monopoly to prevent any competition from entering the market
  - E.g. By purchasing companies who are a potential threat
The UK Competition & Markets Authority defines a monopoly as any firm having more than 25% market share
- It acts to prevent this from happening in most industries

Monopoly Diagram

As a single seller of goods/services, the firm in a monopoly market is also the entire market
- There is no differentiation between the firm and the industry
It is a price maker
- This means that its revenue curves are downward sloping
In order to maximise profits, it produces at the point where marginal cost (MC) = marginal revenue (MR)

Diagram: Monopoly at Profit Maximising Equilibrium

Economic graph illustrating supernormal profit with curves labeled MC, AC, D=AR, MR. Highlighted area shows profit at price P1 and quantity Q1, costs at C1. — **The firm makes supernormal profit in the short-run & long-run as the AR > AC at the profit maximisation level of output (Q1)**

Diagram analysis

The firm produces at the profit maximisation level of output, where MC = MR (Q₁)
- At this level, AR (P₁) > AC (C₁)
- The firm is making supernormal profit $equals space left parenthesis straight P subscript 1 space minus space straight C subscript 1 right parenthesis space cross times space straight Q subscript 1$

Advantages & Disadvantages of Monopoly

In several instances where the Competition & Markets Authority has acted to decrease/limit monopoly power, the firms have taken the Regulator to court in an attempt to convince them that the firms market power will benefit consumers
- Theoretically, this is possible. However, in many cases the desire to maximise profits would prevent this from happening

Evaluating Monopoly Power

Stakeholder	Advantages	Disadvantages
The Firm	Supernormal profits generate money for continued investment in technology and product innovation Market power enables the firm to increase its global competitiveness Economies of scale can increase, thereby lowering the average cost Producer surplus increases Price discrimination can increase revenue	Due to a lack of competition, there is a reduced incentive to be efficient Cross subsidisation can create inefficiencies Monopolies lead to a misallocation of resources as P > MC. The price is above the opportunity cost of providing the goods Due to a lack of competition, innovation sometimes lacks effectiveness
Employees	Supernormal profits often result in higher wages	Having only one supplier in the industry limits the opportunity to change employers
Consumers	Product innovation due to the firm’s supernormal profits may result in a better-quality product Cross subsidisation can lower prices on some products that the firm provides Prices may fall If firms pass on their cost savings (due to economies of scale) in the form of lower product prices	A lack of competition is likely to result in higher prices as no substitute goods are available A lack of competition may result in no product innovation & worse product quality over time May experience worse customer service as the incentive to improve it is limited Cross subsidisation is likely to increase prices on some products offered by the firm e.g. Champagne prices Consumer surplus decreases
Suppliers	Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally	There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers (monopsony power) This price may not be profitable in the long run

Economics-A-level-Aqa

monopoly-and-monopoly-power

Characteristics of Monopoly

Monopoly Diagram

Diagram: Monopoly at Profit Maximising Equilibrium

Diagram analysis

Advantages & Disadvantages of Monopoly

Responses