Transcript Market failure: Monopoly

MARKET FAILURE:
MONOPOLY
AS
Economics
Unit 1
AIMS AND OBJECTIVES
Aim:
 To understand the barriers to entry in a
monopolistic market.
Objectives:
 All: Define a pure monopoly
 All: Explain how pure monopolistic firms can
restrict output and price fix.
 Most: Analyse the barriers to entry in a
monopolistic market.
 Some: Evaluate the case of a monopoly.
STARTER
 In pairs decide on a definition of a Monopoly market.
 To help you think about the objective of playing the
board game monopoly .
2 mins
PURE MONOPOLY DEFINITION
A single firm produces the whole of the output
of a market.
Faces no competition from other firms as
there are no other firms in the market.
100% market share
PURE MONOPOLISTIC MARKET
• Competitive market.
Price
• Monopolistic firm enters the
market.
P2
• In a pure monopolistic
market the firm can restrict
output (Q1-Q2).
P1
D
Q2
Q1
Quantity
• Market equilibrium was (Q1P1)
• Therefore it can charge a
higher price for it’s products
to make higher profits.
NON-PURE MONOPOLY DEFINITION
 A market which is dominated by one firm.
 The firm owns more than 25% of market share.
25%
X
Y
MONOPOLY
An effective monopoly must be able to
exclude rival firms from the market through
barriers to entry (things which stop other
firms entering a market)
A monopoly is strongest when it produces an
essential good for which there is no
substitutes or when demand is inelastic. .E.g.
One firm producing bread/milk. (Unrealistic)
BARRIERS TO ENTRY
 Factors which prevent
firms from entering a
market.
 In a monopoly barriers
which exist are based on
economies of scale.
BARRIERS TO ENTRY
A MONOPOLISTIC MARKET
L
A
M
I
N
B
R
L: LIMIT AND PREDATORY PRICING
 The large monopolistic firms have the lowest costs in
an industry.
 Economies of scale.
 Firm lowers it’s prices to a level where other firms
cannot compete.
 Driving them out of the industry.
BACK
A: ADVERTISING
 Large firms can spread the costs of advertising, as
they produce thousands of units.
 New entrants to the market have to match that level
of advertising expenditure but they cannot.
BACK
M: MULTIPLICIT Y OF BRANDS
 Large monopolistic firms can sell a large number of
different products and brands.
 Targets multiple areas of the market.
 Therefore attracts more customers.
 Tesco stocks 20 varieties of apple!
BACK
I: INTEGRATION (COMBINING TWO FIRMS)
 As monopolistic firms get larger they can integrate,
with larger firms and smaller ones.
 This enables them to use predatory pricing more
effectively.
 Economies of scale
get larger.
BACK
N: NON PRICE COMPETITION
 Strategies to persuade customers to buy goods, without
lowering prices.
 Tesco Clubcard
 8 million users, most popular loyalty card in UK.
 The greater the benefits for the customer, the more years
that customer will remain loyal.
BACK
B: BRANDING
 Brands have unique
characteristics. Built over
many years.
 Created through
advertising.
 Making demand more
inelastic.
BACK
R: RESEARCH AND DEVELOPMENT
 Increasing expenditure on R&D
 Firms can produce products which give
them the edge over their competitors.
 Charge a higher price than their
competitors.
BACK
MINI PLENARY
Write down on your post it note the seven
barriers to entry to monopolistic firms.
PLENARY: MONOPOLY OF FRENCH TAXI
DRIVERS
 http://www.bbc.co.uk/news/world-europe13320358
 What barriers to entry do you feel the new French
taxi drivers facing? (2 Marks)
 Draw the diagram to show what has been
occurring in the French taxi industry prior to this
firm entering the market. (4 marks)
MONOPOLY AND MARKET FAILURE
Occurs because compared to the competitive
market, output falls and the price rises,
leading to under consumption of the good the
monopoly produces.