Transcript Monopoly - PBworks

Monopoly
Some basic observations
What is a Monopoly?
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An industry where there is a single supplier of a good or service that has no close
substitutes and in which there is a barrier preventing new firms from entering is a
monopoly. In practice the boundaries of an industry are arbitrary, and the
determination of monopolies is along and costly business for institutions such as the
Competition Commission.
Different types if entry barriers exist:
Structural barriers (economies of scale)
Strategic barriers (predatory pricing)
Statutory barriers ( patents, licenses given by law)
How Monopolies can develop
• Horizontal Integration. Where 2 firms join at the same
stage of production, e.g. 2 banks such as TSB and
Lloyds
• Vertical Integration. Where a firm gains market power
by controlling different stages of the production process.
A good example is the oil industry. Where the leading
firms produce, refine and sell oil
• Legal Monopoly. E.g. Royal Mail or Patents
• Internal Expansion of a firm. Firms can increase
market share by increasing their sales and possibly
benefiting from economies of scale
• Being the First Firm e.g. Microsoft,
Barriers to Entry
• Legal barriers e.g. law, license or patent
restrictions.
• Natural monopoly e.g. a unique source of supply
of a raw material or economies of scale
• Economies of scale.
• Production differentiation and brand loyalty.
• Ownership of wholesale and retail outlets.
• Mergers and takeovers.
• Aggressive tactics and intimidation
Advantages of monopoly
• Economies of scale and scope.
• Possibility of lower cost curves due to
more research and development
• Innovation and newer products
• Potentially lower prices for consumers
through economies of scale.
Advantages of Monopoly
Lower cost on
consumers
We can see here the Average cost
curve is far lower for monopolies
than firms in a perfectly
competitive market, through the
use of economies of scale.
Because monopoly producers are often supplying goods and services
on a very large scale, they may be better placed to take advantage of
economies of scale - leading to a fall in the average total costs of
production. These reductions in costs will lead to an increase in
monopoly profits but some of the gains in productive efficiency might
be passed onto consumers in the form of lower prices. The effect of
economies of scale is shown in the diagram above.
Disadvantages of Monopoly
• Lack of consumer choice
• High barriers of entry
• Exploitation- e.g Tesco place huge
pressures on suppliers and can dictate to
an extent the price at which they buy.
• Potentially higher pricing for consumers.