Monopoly

Monopoly

sole seller of a product that does not have any close substitutes, price maker, arise due to barriers to entry

Perfect competition

many identical firms, free entry and exit, profit is driven to zero in long-run and ATC to its minimum, only sell at ‘market price’ and face horizontal demand curve

Profit maximising monopoly firms

produce quantity where MR = MC, marginal revenue curve for monopolists sits below the market demand curve

Monopoly inefficiency

produces too little, produces where MR=MC, but P>MR, customers consume where MB = P, therefore MB = P > MR=MC

non-natural monopoly

where firms wield market power despite having upward sloping ATC curves, best resolved by competition

Recognising monopoly

higher price-cost margin, PCM = (P - MC) /P, suggests monopolies in market

antiturst

regulations designed to promote market competition, protect consumers and prevent monopolies or anti-competative behaviour

Difficulties regulating non-natural monopolies

large firms are powerful, can influence legislation, regulatory capture - where regulatory agencies prefer to work with the monopoly than against it

natural monopoly

Where the ATC curve is downward sloping for all relevant production levels, firms with constant marginal cost - markets are best served by monopolies

regulating natural monopoly

problem is underproduction, price ceiling or subsidies