3.4 monopoly and monopoly power

a monopoly is when

there is only one firm in the market

conditions if a monopoly are

there is a sole supplier, no adequate substitutes, barriers to entry and exit can be maintained

characteristics of monopolies are

profit maximising, price maker, price discrimination

monopoly power in the UK

is when one firm has more than 25% market share

monopoly power is influence by factors such as

barriers to entry, the number of competitors, advertising, the degree of product differentiation

examples of barriers to entry effecting monopoly power are

economies of scale, limit pricing, owning resources, sunk costs, brand loyalty, set up costs,

barriers to entry influence monopoly power are

the higher the barriers to entry, the easier it is for firms to maintain monopoly power

economies of scale is a barrier to entry because

as a firm grows larger the average cost of production falls, meaning large firms have a cost advantage over new entrants to the market which deters new firms from entering the market as unable to compete

limit pricing is a barrier to entry as

it means that new firms cannot enter the market profitably, therefore deterring their entrance

owning a resources is a barrier to entry as

early entrants to a market can establish their monopoly power by gaining control of a resource, making it difficult and complicated for new firms to enter

sunk costs are a barrier to entry as

if unrecoverable costs, such as advertising, are high then new firms will be deterred from entering the market because if they are unable to compete they will not get the value of the costs back

brand loyalty is a barrier to entry because

if consumers are very loyal to a brand, which can be increased with advertising, it is difficult for new firms to gain market share

set up costs are a barrier to entry

as if it is expensive to establish a firm, the new firms will be unlikely to enter the market

the number of competitors in a market effects monopoly power as

the more firms, the lower the barriers to entry, the harder it is to gain a large market share

advertising affects monopoly power as

advertising an increase consumer loyalty, making demand price inelastic, creating a barrier to entry

the degree of product differentiation affects monopoly power as

the more the product can be differentiated, through quality, pricing and branding, the easier it is to gain market share. because the more unique the product seems, the fewer competitors firms face

monopolies can profit maximise in

the SR and LR as there are barriers to entry which prevent new firs entering and taking away the sn profits

possible advantages of monopolies stem from

economies of scale and dynamic efficiency

in a natural monopoly, the LRAC curve

is l shaped and only room for one firm to benefit from EOS

static efficiency is

efficiency at a particular point in time

dynamic efficiency is

in the long run, leading to the development of new produces and more efficient processes that improve productive efficiency

monopolies are dynamically efficient because

they can make SN profits in LR and SR, which can be used for innovation and technological progress helping to achieve improvements in dynamic efficiency through funding RnD.

however, monopolies may not be dynamically efficient because

there is an argument that monopolies actually reduce rather than promote innovation and dynamic efficiency, protected from competitive pressures monopolies may profit satisfied rather than maximise

productive efficiency is

the level of output at which average costs of production are minimised

allocative efficiency occurs

when it is impossible to improve overall economic welfare by reallocating resources between markets, P=MC

productive efficiency and allocative efficiency can only occur if

all firms benefit from all available EOS even at low levels of output, therefore minimium efficient scale has to be small in relation to total market size, there are perfectly competitive markets for all goods and services, no externalities

for allocatively and productive efficiency to truly happen there needs to be no externalities because

there is a difference to private costs and benefits and social costs and benefits, profit maximising firms only take into account their private costs and benefits therefore allocative efficiency is at P=MPC and therefore if the good has negative externalities P<MSC which is not allocatively efficient

private costs and benefits are

costs solely incurred by an individual or firm as a result o their own activities

social costs and benefits

fall on the whole of society, no matter who consumed/produced