Monopolies

Conditions for a perfectly competitive market

Conditions for a perfectly competitive market

• Infinite number of suppliers and consumers

  • Each firm has no market power and is a price taker

• Consumers and producers have perfect information

• Products are homogenous (identical)

• No barriers to entry or exit

• Firms are profit maximisers

• The price is determined by the price mechanism

Factors influencing the structure of markets

• Product differentiation

• Number of firms

• Level of barriers to entry

Every real-life market lies between two extremes - perfect competition and pure monopoly.

Pure monopoly

A market with a single supplier which has 100% market share.

Monopoly power

Firms which can influence the price of a particular good on their own. They act as price makers by controlling supply to influence the good’s price.

Firms providing essential goods/services with no substitutes have the greatest monopoly power.

Natural Monopolies

• Industries where there are high fixed costs and/or large economies of scale

• A monopoly might be more efficient than having lots of firms competing in this case

Barrier to entry

Any obstacle that makes it impossible or unattractive for a new firm to enter into a market.

Examples of barriers to entry

• High start-up costs which are non-recoverable if a firm leaves the industry

• Patents and copyrights

• Legislation

• Brand loyalty

n-firm cncentration ratio

Measures the level of domination of n number of firms in a market

Advantages of Monopolies

• Can take advantage of economies of scale to keep average costs low

• The security a monopolist has in the market means it can take a long-term view and invest in R&D

• When the market is dominated by a few large firms they might still compete with each other

  • This could reduce costs and improve the quality of their products

Disadvantages of Monopolies

• Restriction of consumer choice as there are fewer products to choose from

• Fewer incentives to innovate

• No incentive to cut costs as they are price makers, resulting in exploitation of customers through high prices and inefficiency

• Exploitation of suppliers by demanding a low price from them