3.1.4.4 MONOPOLY AND MONOPOLY POWER

Define monopoly

One firm only in a market

Define pure monopoly?

A single seller that controls 100% of market share for a product with no close substitutes

Define natural monopoly?

A single firm can supply the entire market at a lower average cost than multiple firms due to economies of scale

Define technical monopoly?

A firm that maintains its dominant position through its control over the

• production process

• unique technology

• superior manufacturing methods

What type of monopoly can geography create?

A local monopoly

What is a local monopoly?

When physical isolation or small population makes it unprofitable for competition to enter

Example of a local monopoly

Eg. Single grocery store in a remote village

In a local monopoly, what 3 things can this effect?

• price

• quality

• availability

How is price effected?

• with no nearby alternatives, the store has strong pricing power (demand in inelastic)

How is quality affected?

• quality may decline

• geographical, there is no incentive to improve quality to attract customers

How is availability affected?

• the store may stock a smaller range

• there may be frequent stock shortages

On the other hand, how may availability be improved?

• the shop may ensure basic essential are always available, as it is the only supplier

Does advertising increase market power?

Yes

What are the 3 types of advertising?

1. Information advertising

2. Persuasive advertising

3. Saturation advertising

Conditions of monopoly?

• % single seller (no competitors)

• unique product

• price maker (profit maximization)

• high barriers to enter and exit

• supernormal profits

• imperfect information (asymmetric)

• product differentiation is non-existent (no other products to differentiate from)

How do monopolies use advertising?

Advertising aims to strengthen the firms market power (NOT beating a rival)

What is abnormal profit?

Any profit above normal profit