3.4.5 monopoly

Characteristics of a monopoly

• only one firm in the industry which sets output therefore is price maker
• monopolist is short run profit maximiser
• barriers to entry prevent new firms entering the market
• one supplier in the industry

How are monopolies formed?

• gov created monopoly- EXAMPLE 150 years till 2013 Post Office LTD had monopoly on delivery letters
• patents/ high barriers to entry- can offer firm protection for 5-20 years each

Outcomes of monpoly

• higher prices ( above MC)
• lower output
• abnormal profits can be made in LR

CMA monopoly definitions

Working/legal monopoly - 25% market share or more
Dominant firm- 40%

Monopoly example

Search engines- GOOGLE 85.55%

Profit max equalibrium

• to max profits monopoly produce at point where Marginal costs MC= marginal revenue MR

Monopoly diagram analysis

• produces at profit max level MC=MR
• at this level AR- avg revenue (p1) is greater then AC- avg cost (c1)
• firm making SNP

What is price discrimination?

When firms charge different prices for identical g/s by exploiting consumers different willingness/ ability to pay

Ways to split market- price discrimination

• time (peak/ off peak- TFL)
• location- NETFLIX
• income
• age ( child

Conditions for price discrimination

-monopolist must face different demand curves from diff groups of buyers ( electricity of d must differ)

• monopolist must be able to split market into distinct groups of buyers
• ability to prevent resale tickets- monopolist must be able to keep markets separate at relatively low cost to prevent selling between groups

How PD illustrated diagrammatically?

• different sub markets side by side— NORMAL FIRM-> INELASTIC DEMAND -> ELASTIC DEMAND

Diagram Analysis of price determination

• overall firm producing at MC=MR- Mc= mr and ac extrapolated across sub markets
• higher price for inelastic A and lower for elastic B
• profit in sub markets A and B> firms total profit in in normal if charged single price for all consumers

Cost of third degree price discrimination

• many price inelastic consumers loose out as pay higher prices lowering consumer surplus
• for firms- setting and enforcing price discrimination can increase avg costs- costs of PD must not outweigh revenue gained

Benefits of third degree price discrimination

• consumers- elastic will benefit as pay less increasing CS
• consumers- some gain as higher prices may decrease QD and in some markets this increases consumer utility e.g. trains
• firms- TR increases leading to higher profits
• firm- increased producer surplus at expense of decreasing CS

Benefit of monopoly for firm

• SNP generate finance for continued investment in tech and product innovation
• market power enables global competitiveness
• EOS can increase- decreasing avg costs of production
• PS increases
• price discrimination- increase TR

Costs of monopoly to firm

• no comp so no incentive to be efficient
  -can lead to misallocation of resources- P>MC
• lack of comp means innovation lacks effectiveness

Benefit of monopoly to consumer?

• innovation due to SNP can give better quality product
• price may fall if firms pass on savings from EOS

Cost of monopoly to consumer?

• lack of comp higher prices and no substitute goods
• lack of comp means no innovation and worse quality over time
• worse customer service
• decreased CS

Benefit of monopoly to supplier

• increased volume of sales for some as able to supply products that are distributed nationally or internationally

Cost of monopoly to supplier

Less comp for their products and monopoly often has power to dictate what price they pay suppliers

• price may not be profitable in LR

What is a natural monopoly

Optimum number of firms in industry is one- one firm can supply entire market at lower LRAC than multiple

• often due to associated infrastructure issues- e.g. only need one water supplier
• or significant sunk costs
• or ability of EOS to lower prices for consumer

Why do natural monopolies exist?

• high fixed costs and falling AC over time
• the more it is used the lower the avg cost over time

Where do natural economies usually occur

Utility industries and are regulated by gov to ensure consumers are not charged higher monopoly prices
— regulation often price cap or max price

• competition would cause duplication of infrastructure
• meet efficiencies

Why is monopoly a market failure?

• limit efficiency

Gov intervention- tax monopoly profits

A one off windfall tax on SNP from monopoly power
EVAL- risk of tax avoidance/ loss of capital investment spending