Monopolies

Monopoly

Where there is only one firm in a market

Legal monopoly

When a firm has over 25% market share and is granted exclusive rights by government regulation, preventing competitors from entering the market.

Assumptions of a monopoly

• Only one firm

• The firm is a profit maximiser

• Assume high barriers to entry

Types of barriers to entry

• Legal barriers

• Sunk costs

• Brand loyalty

Legal barriers + examples

Used to stop new firms from using ideas from an incumbent firm

Examples: Patents, copyrights, trademarks

Sunk costs

Costs that can’t be recovered once a firm leaves the market

Brand loyalty

The tendency of consumers to continue buying a particular brand's products over competitors, often due to positive experiences or emotional connections.

Natural monopoly + example

When a monopoly is most efficient if only one firm is in the market Example: TFL - Monopoly for all transport in London (approx 63% market share)

Types of efficiencies

• Allocative efficiency (MC=AR)

• Productive efficiency (AC=MC)

• Dynamic efficiency (AR>ATC)

• X-inefficiency

X-inefficiency

When for a given level of output a firms costs are above the AC curve, often resulting from excessive bonuses or inefficiencies in management.

What type of efficiency does a monopoly have?

They are only dynamically efficient. They must produce at P_max.

Evaluation: to be dynamically efficient firms must invest their SNP into becoming dynamically efficient - Not always the case as CEO’s can pocket the profits for themselves instead

why do governments own + support monopolies if they’re so inefficient?

• High sunk costs - Its only financially efficient to have 1 firm with high sunk costs than to introduce a second firm that would have to pay the high sunk costs to become part of that market

• Huge internal economies of scale - Monopolies can achieve significant cost savings by increasing production, allowing them to lower average costs and benefit consumers with lower prices.

Price discrimination

When a firm charges different groups of consumers different prices but for the same good

Conditions of price discrimination

• Have significant market power

• Have information on consumer elasticities

• Be able to limit reselling

Example: TFL - charges commuters different prices (zip-oyster card for students, oyster card for adults)

What do firms gain from price discriminating?

Increased SNP’s as they’re retaining as many consumers as possible using the information they have on their elasticities

What is price discrimination dependent on?

The elasticities of the consumers

Deadweight loss

The loss of economic efficiency that occurs when a market does not reach its equilibrium point.

Why can monopolies be seen as bad for the economy?

They decrease the level of society surplus
- Consumers are exploited with high prices
- They are a cause of market failure

1st Degree price discrimination + Effects

When consumers are charged the exact price they’re willing and able to pay for a good or service
Effects: Erodes consumer surplus and turns it into monopoly profit

2nd Degree price discrimination

When a firm changes their price last minute to fill a capacity that must be accounted for in their revenue