Professional Documents
Culture Documents
Definition of Monopoly:
A pure Monopoly is defined as a single seller of a product. i.e. 100% of market share.
In the UK a firm is said to have monopoly power if it has more than 25% of the
market share. For example, Tesco @30% market share or Google 90% of search
engine traffic.
Monopoly Diagram
A monopoly maximises profits where MR=MC. It sets a price of Pm and quantity Qm.
Problems of Monopoly
1
Higher Prices. Firms with monopoly power can set higher prices than in a
competitive market. (Green area is supernormal profit)
X Inefficiency. It is argued that a monopoly has less incentive to cut costs because
it doesnt face competition from other firms.Therefore the AC curve is higher than it
should be.
Higher Prices to suppliers - A monopoly may use its market power and pay lower
prices to its suppliers. E.g. Supermarkets have been criticised for paying low prices to
farmers.
Charge higher prices to suppliers. Monopolies may use their supernormal profits to
charge higher prices to suppliers.
o see also: Disadvantages of Monopolies
Advantages of Monopoly
1. Economies of scale
If there are significant economies of scale, a monopoly can benefit from lower
average costs. This can lead to lower prices for consumers.
In the above example If there were 3 firms producing 3,000 units at an average cost of
17, average costs would be higher than a monopoly producing 10,000 units.
Therefore, for natural monopolies and industries with significant economies of scale,
monopolies can be more efficient.
Evaluation of Monopolies
Some industries need a lot of research and development (e.g. building new
aeroplanes, research drugs). Therefore, a monopoly may be needed in this industry.
Horizontal Integration. Where two firms join at the same stage of production, e.g.
two banks such as TSB and Lloyds
Internal Expansion of a firm. Firms can increase market share by increasing their
sales and possibly benefiting from economies of scale. For example, Google became a
monopoly through dominating the search engine market.
Being the First Firm e.g. Microsoft has created monopoly power by being the first
firm.
Monopolies also need barriers to entry to protect them from new firms entering the market.
Barriers to entry can include brand loyalty through adverstising and economies of scale