3.4.5 Monopolies

Characteristics of a monopoly

Monopoly is a market structure characterized by the following features:

1. Single Seller: In a monopoly, there is only one firm or seller that dominates the entire market, with no close substitutes for its product.

2. Unique Product: The monopolist typically offers a unique product that has no perfect substitutes. This lack of substitutes gives the monopolist significant control over pricing.

3. High Barriers to Entry: Monopolies often maintain their dominant position due to high barriers to entry, which can include factors like patents, economies of scale, control over essential resources, and government regulations.

4. Price Maker: A monopoly has the power to set the price of its product, and it faces a downward-sloping demand curve. It can choose the price and quantity of output to maximize its profits.

5. Market Power: Monopolies have substantial market power, meaning they can influence market conditions, restrict output, and charge higher prices than would be possible in a competitive market.

6. Long-Run Profitability: Monopolies can earn long-term economic profits because of their ability to set prices above their production costs.

A legal monopoly = 25%

Monoplies

A basic discussion of pro’s and cons

Pro’s	Con’s
Dynamic efficiency - due to the making of SNP monopolies will be able to re-invest in their business - this may benefit consumers if it is new capital that will not only cut costs but improve quality also	Allocative inefficiency - price is higher than MC - exploits customers as they are paying more than the costs to produce - lower consumer surplus - on top of restricted output/ choice for both consumers and workers - quality issues as well - show DWL in consumer
Greater economies of scale purely due to their size. This is because monopolies AC is naturally lower than perfect competition due to greater EoS and prof max would be charging a lower price at a higher quantity than perfect competition charging higher and being productively efficient.	Productively inefficient - volountarily forgo EoS as they are aren’t competing on price - therefore do not operate at lowest point on the AC curve - costs are higher than they should be - this will be passed on to consumers - decreases consumer surplus
Natural monopoly - a regulated natural monopoly will give society greater benefits. High SNP can subsidise goods that are making a loss - merit goods - keep consumers and society happy - positive externality	X inefficient - Allow for waste in productive process as there is no drive to be efficient cost wise
	Inequalities in necessity markets - groceries - for those on the lower income in society as this would increase inequalities

EVALUATION:

• Dynamic efficiency - is this really happening? Despite monopolies high SNP we don’y know wheta they’ll be re investing in - they could save, pay workers more, give to shareholders and NOT capital in the business

• EoS - depends on the soze of the firm

• Objective - we assume that its to profit maximise but what if it isn’t? What if its sale max for not for profit org

• Regulation of monopolies - this can ensure their benefits to society

• Competition ??? There could still be strong competition i.e UK supermarkets - Tesco has monopoly power yet there is still significant competition in contesible markets

Natural = LRAC continually drop as output increases

Legal = 25% or more

Dominant = 40% or more

Monopoly power = where a firm acts like a monopoly due to concentration ration in a market

See notes for perfect annotation of SNP/DWL

Benefits to stakeholders:

• Employees

  • If a firm is making high levels of SNP workers wages may increase along with their job security as firms will not look to cut costs

• Shareholders

  • Receive grave dividend payments and their sharevalue will increase which may either incentivise them to sell for more or keep hold

• Government

  • The bigger a monopoly gets the more SNP it is generating, the larger the tax revenue the govt. will be receiving which may be reinvested to benefit society ( in turn benefiting the wider community ). Similarly, the govt. may benefit from higher employment - decrease their costs of benefit payments and decreasing opportunity costs

• Local community

  • The monopoly may use SNP to invest in infastructure - to better methods of transportation to cut their costs but in turn benefit the wider community i.e Kingsway business park

• Consumers

  • May benefit if mono is re investing SNP into improving capital/ R and D to better the quality of their products

• Suppliers

  • May even benefit from EoS if they are sending lots of stock to one singluar mono this will cut their costs - i.e. much less expensive tp travel to one firm with bulk than lots of diff all other country

Negatives to stakeholders:

Monopolies can also bring about DWL to society = market failure

• Workers

  • A mono may benefit from monopsony power also - this is where they are a single buyer of a resource

  • So, if workers are unhappy with their pay and a mono have monopsony power of labour - they really have no other choice in this

• Consumers

  • Mono are price makers

  • Due to minimal competition - they aren’t competing on price

  • This coincided with usual x inefficiency making their costs high results in high prices for consumers and lower output

  • This high price decreases consumer surplus as well as limited choice

• Suppliers

  • If mono is benefiting from economies of scale from their supplier they may be missing out on profit

  • As well as this, if there is only one firm in a market, they are not maximising the quantity of output they could be doing

Dead weight loss = A loss in efficiency in society as a whole

In a mono both consumers and producers suffer from this

Consumers = consumer surplus diminishes due to the fact that monoploies are allocatively inefficient - results in higher prices to cover higher costs.

Producers = Due to not being productively efficient - costs are higher and output is diminished so not making as much profit as they could do

Second digram

REALLY GOOD EVLT

Price Discrimination

What is it ? Where a firm charges different consumers different prices for the same good/service with no difference in CoP

Consitions for this:

• Price making ability - monopoly power

• Correct info to separate the market

• Prevent re-sale ( market seepage )

First degree:

• Firms charge as much as consumers are willing to pay - turning all consumer surplus into monopoly profit

Second degree:

Second Degree Price Discrimination

This involves charging different prices depending upon the choices of consumer. For example quantity, time period, collecting coupons

• After 10 minutes phone calls become cheaper.

• Electricity is more expensive for the first number of units. For a higher quantity of electricity consumed the marginal cost is lower.

• Loyalty cards reward frequent buyers with discounts on future products.

• If you collect coupons from a newspaper you can get a discount.

2nd-degree price discrimination is sometimes known as ‘indirect price discrimination’ because the firm allows consumers to choose which price they will pay. Some choices are offered cheaper because they impose costs on consumers (e.g. collecting coupons, buying in bulk or unsocial hours.

Third Degree Price Discrimination – ‘Group price discrimination’

This involves charging different prices to different groups of people. For example:

• Student discounts,

• Senior citizen railcard

• Peak travel/ off-peak travel

• Cheaper prices by the time of the day (e.g. happy hour’s in pubs – usually earlier on in evening where demand is lower.

This can definitely benefit society and social welfare !

ASSUMING SAME MCS is the same for all