, Monopoly 25 marker:
Evaluate whether such a high market share for one company is in the consumer interest (25)
Intro: Apple are a legal monopoly as they have over 25% share of the market - this is when
one rm dominates the whole market - and there are very high barriers to entry and exit
1) one likely bene t to consumers of a monopoly like apple existing is a potential for a
higher level of allocative e ciency - larger rms can tap into economies of scale - this is
when LRAC is falling as output rises - e.g purchasing econs as they bulk buy raw materials
such as camera parts, microchips, etc - another economy of scale that they can exploit is
nancial econs of scale, this is when larger rms are able to take out larger loans but also
can receive lower interest as they are classed as less risky - therfore this will lower
repayment costs - lowering LRAC - furthermore they could use this loan to invest into
improving machinery and tech - this will further decrease the cost of manufacturing iPhones
- as apple expands and taps into econs of scale they will likely be able to get closer the
minimum e cient scale - therefore productive e ciency increases - these lower costs may
be passed onto consumers through lower prices - therefore allocative e ciency increases
↳
costs
LRAC
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However, a rm such as apple may be highly ine cient - one reason is that there is a
danger of larger rms expanding too much and experiencing diseconomies of scale and
moving beyond the MES, therfore LRAC increases - this could be due to it being harder to
communicate between di erent departments, or maybe sta become alienated and lack
motivation, etc, therefore they may have to pass on the increased costs to consumers
through higher prices - another reason is that they may experience X-ine ciency - this is
because as there is a lack on competition in the market, they may become complacent and
incur unnecessary costs - therefore consumers may get higher prices
2) another likely bene t to consumers of a monopoly like apple existing is that they are likely
to be dynamically e cient - as barriers to entry are very high, e.g have high econs of scale,
high brand loyalty, etc - because of that, apple are able to make signi cant amounts of
supernormal pro t
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As apple make so much supernormal pro t - they are able to invest that into the latest
technology and R&D - e.g they can invest the pro ts made from the iPhone into the
development of a wider range of products, such as the IPad, apple watches, AirPods, etc - if
apple weren’t a monopoly and didn’t generate the amount of pro ts they did, then these
products may not have been brought to the market - so apple being a monopoly are able to
innovate, o er wider range of products, could produce goods that are more a ordable for low
income households, etc - this therefore translates into consumers getting higher quality
goods and services
However, a monopoly may abuse its dominance in the market - one thing could be that the
lack of substitutes in the market mean that PED is likely inelastic - therefore they know that if
they increase their price, it would result in higher revenue and pro ts - as shown that in the
last decade, the price of iPhones has risen largely - so iPhones have become more expensive
as apple has started to dominate the market and as demand has become more and more
inelastic - another thing is that there is evidence of apple abusing its dominance - apple a few
years ago admitted that their software updates on iPhones were slowing down and killing o
older models - in other words, the batteries for older models would start to die faster - they
did this so that consumers would go and buy the newer iPhones - clearly abusing consumers
Overall judgement: The CMA should allow monopolies like apply to exist as they clearly
bene t consumers in the form of allocative and dynamic e ciency - but they should closely
monitor their activities to ensure that the bene ts to consumers are realised whilst the
potential risks are prevented
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, Contestable markets:
Contestability - is to do with how realistic the threat of entry is - how easy or di cult is it for
rms to be able to enter the market - not about how many rms in the market, its about how
easy the access into the market is
A contestable market = is one in which there are low barriers to entry and exit and low sunk
costs
• In a contestable market - new entrants are likely to spot gaps in the market so they are able
to compete against the larger rms as the gap will make their products more unique
• E.g in the car industry before EV’s were in the market - the car market consisted of diesel
and electric cars - but then a gap in the market was discovered, this is when electric
vehicles came into the market
Factors that suggest a market is contestable -
1) if there is evidence of rms entering the market (the market has become more fragmented -
more players in that industry because others have entered the market)
2) if there is a gap in the market - e.g in the chocolate market, a gap could’ve been healthy
chocolate
3) if incumbent (existing) rms receive reputational damage - this will lower their brand loyalty,
lowering barriers to entry and giving new entrants an opportunity to enter the market - and
thus the market becomes more contestable - e.g Tesco and their horsemeat scandal
4) if incumbent rms are being ine cient - new rms could then enter the market being more
e cient than existing rms and compete with them on a cost basis
Factors that suggest a market is not contestable -
1) if the incumbent rms have strong brand loyalty - makes it harder for someone to enter the
market - e.g in the phone market it will be hard to compete against apple and Samsung
2) if reaching the MES requires signi cant capital then very few rms will be able to enter the
market - therefore the market is not contestable
3) if incumbent rms are advertising - advertising is a sunk costs and the theory of
contestability suggests that there are low sunk costs - this can make it hard for new rms to
enter the market if existing rms spend lots on advertising as the new rms wont have enough
nance to advertise on the save volume of the incumbent rms - therefore the new rms
adverts wont be as e ective as the incumbent rms - therefore the market is not contestable
4) if incumbent rms are being e cient - their costs are likely to be very low - this can make it
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Evaluate whether such a high market share for one company is in the consumer interest (25)
Intro: Apple are a legal monopoly as they have over 25% share of the market - this is when
one rm dominates the whole market - and there are very high barriers to entry and exit
1) one likely bene t to consumers of a monopoly like apple existing is a potential for a
higher level of allocative e ciency - larger rms can tap into economies of scale - this is
when LRAC is falling as output rises - e.g purchasing econs as they bulk buy raw materials
such as camera parts, microchips, etc - another economy of scale that they can exploit is
nancial econs of scale, this is when larger rms are able to take out larger loans but also
can receive lower interest as they are classed as less risky - therfore this will lower
repayment costs - lowering LRAC - furthermore they could use this loan to invest into
improving machinery and tech - this will further decrease the cost of manufacturing iPhones
- as apple expands and taps into econs of scale they will likely be able to get closer the
minimum e cient scale - therefore productive e ciency increases - these lower costs may
be passed onto consumers through lower prices - therefore allocative e ciency increases
↳
costs
LRAC
I consume
welgorl
ㅱ ←
i Mas
b {
P - --
.,
'
:
←
'
¤
→
㉜ Q
However, a rm such as apple may be highly ine cient - one reason is that there is a
danger of larger rms expanding too much and experiencing diseconomies of scale and
moving beyond the MES, therfore LRAC increases - this could be due to it being harder to
communicate between di erent departments, or maybe sta become alienated and lack
motivation, etc, therefore they may have to pass on the increased costs to consumers
through higher prices - another reason is that they may experience X-ine ciency - this is
because as there is a lack on competition in the market, they may become complacent and
incur unnecessary costs - therefore consumers may get higher prices
2) another likely bene t to consumers of a monopoly like apple existing is that they are likely
to be dynamically e cient - as barriers to entry are very high, e.g have high econs of scale,
high brand loyalty, etc - because of that, apple are able to make signi cant amounts of
supernormal pro t
fi fi ffi
fi fifi ffi fi ff
ffi fifi ffi
ffi
, ㄑ /R
i '
θ
As apple make so much supernormal pro t - they are able to invest that into the latest
technology and R&D - e.g they can invest the pro ts made from the iPhone into the
development of a wider range of products, such as the IPad, apple watches, AirPods, etc - if
apple weren’t a monopoly and didn’t generate the amount of pro ts they did, then these
products may not have been brought to the market - so apple being a monopoly are able to
innovate, o er wider range of products, could produce goods that are more a ordable for low
income households, etc - this therefore translates into consumers getting higher quality
goods and services
However, a monopoly may abuse its dominance in the market - one thing could be that the
lack of substitutes in the market mean that PED is likely inelastic - therefore they know that if
they increase their price, it would result in higher revenue and pro ts - as shown that in the
last decade, the price of iPhones has risen largely - so iPhones have become more expensive
as apple has started to dominate the market and as demand has become more and more
inelastic - another thing is that there is evidence of apple abusing its dominance - apple a few
years ago admitted that their software updates on iPhones were slowing down and killing o
older models - in other words, the batteries for older models would start to die faster - they
did this so that consumers would go and buy the newer iPhones - clearly abusing consumers
Overall judgement: The CMA should allow monopolies like apply to exist as they clearly
bene t consumers in the form of allocative and dynamic e ciency - but they should closely
monitor their activities to ensure that the bene ts to consumers are realised whilst the
potential risks are prevented
fi ff fi fi fi
, Contestable markets:
Contestability - is to do with how realistic the threat of entry is - how easy or di cult is it for
rms to be able to enter the market - not about how many rms in the market, its about how
easy the access into the market is
A contestable market = is one in which there are low barriers to entry and exit and low sunk
costs
• In a contestable market - new entrants are likely to spot gaps in the market so they are able
to compete against the larger rms as the gap will make their products more unique
• E.g in the car industry before EV’s were in the market - the car market consisted of diesel
and electric cars - but then a gap in the market was discovered, this is when electric
vehicles came into the market
Factors that suggest a market is contestable -
1) if there is evidence of rms entering the market (the market has become more fragmented -
more players in that industry because others have entered the market)
2) if there is a gap in the market - e.g in the chocolate market, a gap could’ve been healthy
chocolate
3) if incumbent (existing) rms receive reputational damage - this will lower their brand loyalty,
lowering barriers to entry and giving new entrants an opportunity to enter the market - and
thus the market becomes more contestable - e.g Tesco and their horsemeat scandal
4) if incumbent rms are being ine cient - new rms could then enter the market being more
e cient than existing rms and compete with them on a cost basis
Factors that suggest a market is not contestable -
1) if the incumbent rms have strong brand loyalty - makes it harder for someone to enter the
market - e.g in the phone market it will be hard to compete against apple and Samsung
2) if reaching the MES requires signi cant capital then very few rms will be able to enter the
market - therefore the market is not contestable
3) if incumbent rms are advertising - advertising is a sunk costs and the theory of
contestability suggests that there are low sunk costs - this can make it hard for new rms to
enter the market if existing rms spend lots on advertising as the new rms wont have enough
nance to advertise on the save volume of the incumbent rms - therefore the new rms
adverts wont be as e ective as the incumbent rms - therefore the market is not contestable
4) if incumbent rms are being e cient - their costs are likely to be very low - this can make it
fiffi
fi fi fffi fifi fi fi ffiffi fi fifi
