monopolies

characteristics of a monopoly

- one seller
- infinite number of buyers
no close substitutes
- impassable barriers to entry
- short run profit maximiser

monopoly vs competition

in a monopoly, prices are higher, output is lower, profits are larger, consumer surplus is smaller and social welfare is lower than in a competitive market

monopoly diagram

prof maximisers so supply where MC = MR
PABC = supernormal profits
SR and LR diagrams are the same as barriers to entry are impassable

why are monopolies x-inefficient?

absence of competitive pressure gives little incentive to cut costs so the average and total costs are higher than they would be with perfect competition

why are monopolies allocatively inefficient?

they set a price greater than MC

why are firms productively inefficient?

produce where MR=MC rather than where MC=AC

why is there a deadweight welfare loss to society where there is a monopoly?

output in a monopoly is at MC=MR rather than MC=AR in a perfectly competitive market → fall in consumer surplus and thus a DWL

advantages of monopolies

- supernormal profits: reinvested for innovation and R&D
- can match power of global companies
- price discrimination: raises TR
- EoS: large firm → AC lower than small competitive firms
- cross subsidisation may lead to an increased range of goods and services for consumers

disadvantages of monopolies

- less incentive to be efficient and innovate due to absence of competitive pressure
- higher prices and less choice for consumer
- inefficient → higher cost curves
- misallocation of resources as prices are set above marginal cost
- may waste resources due to cross-subsidisation

cross subsidisation

using profits from one sector to finance losses in another sector