Market power: Monopolies

What is a monopoly?

A market structure characterised by a single seller with complete control over the supply of a product or service, lacking close substitutes

What do monopoly firms have?

• High/absolute market power

• High/perfect market share

• Perfect industry concentration ratio

How do governments intervene in monopolies/the market?

Often regulate mergers to prevent any firm from exceeding 25% market share

What are some characteristics of a monopoly market?

• One firm

• Unique products (no substitutes)

• Absolute market power

• Price maker

• Abnormal profits

• High barriers to entry

• Productively and allocatively inefficient

• Steep/inelastic demand curve

• High customer loyalty

What are a monopolies profits in the short term?

Abnormal/supernormal profits

What are a monopolies profits in the long term?

Supernormal profits can persist due to high barriers to entry

When does a monopoly earn normal profit?

• AR = AC

• When the monopolist is breaking even

• No abnormal profit, but is profit maximising at MC = MR

When does a monopoly make short run losses?

• When AR < AC

• Still produces at MC = MR

• Monopolist minimises loss but cannot sustain this long term

What is the productive efficiency in perfect competition in comparison to a monopoly?

• Perfect competition produces efficiently at MC = AC

• Monopolies do not produce efficiently as MC < AC

What is the allocative efficiency in perfect competition in comparison to a monopoly?

• Perfect competition produces at allocative efficiency at P = MC

• Monopolies do not produce at allocative efficiency as P > MC

What is the welfare loss in perfect competition in comparison to a monopoly?

• There is no welfare loss in perfect competition

• There is a welfare loss in a monopoly

What are the advantages of a monopoly?

• Firm has abnormal profits → increases research and development and global competitiveness, economies of scale

• Higher wages for employees from abnormal profits

• More possible innovation, cross subsidisation, lower prices from scales for consumers so cheaper prices

• Stable demand and large contracts for suppliers

What are the disadvantages of a monopoly?

• Reduced efficiency and innovation of firms

• Employees have less mobility

• Higher prices, lower quality and reduced surplus for consumers

• Monopsony power (unfair prices) for suppliers

What is a natural monopoly?

Occurs when one firm is the most efficient due to

• High sunk costs

• Large economies of scale

What is an example of a natural monopoly?

Water, electricity, nuclear power

What are some characteristics of natural monopolies?

• Often government regulated eg. price caps

• Entry of new firms are lost due to lower demand per firm