MONOPOLY:
A monopolist is a single seller of a good or a single provider of a service.
A pure monopoly is a market structure where one company is the single supplier of a
product, and there are no close substitutes for the product available.
It is rare for a firm to have a pure monopoly – except when the industry is state-
owned and has legally protected monopoly.
The royal male used to have a statutory monopoly on delivering household mail. This
is changing fast as the industry has seen fresh competition.
Sources of Monopoly:
1. Barriers to entry – anything that prevents a new firm from entering the
market.
2. The number of firms in the market – as a rule, markets with few firms’ gives
the firms more monopoly power.
3. Importance of advertising – when brands are heavily advertised it makes it
harder for new products to take market share from more established brands.
4. Product differentiation – if a brand is perceived as ‘better quality’ then
producers will still be able to sell the product even at a price premium.
Barriers to entry:
A barrier to entry is anything that prevents new firms from entering the market.
Innocent (natural) barriers to entry – these exist merely as a by product of doing
business
Economies of scale: scale firms cannot reduce costs enough to compete with
larger firms.
Network effects: if you have a product which is only for use if others are using
it (consumers or producers) e.g. Facebook, twitter or air miles then it is very
hard to get people to switch to a new service.
Strategic (artificial) barriers to entry – barriers that have been set up by firms to
prevent others from entry.
Legal barriers: patents, intellectual property rights, copyright. For at least a
few years, an innovation has a monopoly; any other entrant is subject to legal
barriers to entry.
Advertising and development costs: sunk costs which firms deliberately incur
to try stand out from potential entrants and competitors. Firms must get
their products well known and keep up with others, only certain entrants can
achieve this.
Outlet location: if you can get your shop into somewhere like an airport, you
can get a lot of money, as there are many customers. However, the fierce
competition in such places means that only those who can get to such places
to survive.
, Pricing barriers (artificial) – firms can use pricing tactics as a barrier to entry
Limit pricing: one a firm has a share of the market, it wants to keep it. When
it hears of a potential competitor, it may lower the price to deter the
competition from setting up. The limit price is the minimum price a
monopolist could set which would allow a new firm to enter the market and
just earn normal profits. PL = Price limit. If the monopolist increases output
beyond Q, the price falls below PL so residual demand curve below AC, so a
new firm couldn’t make normal profits and won’t enter the market. A
monopolist could set a price below the limit price and still make supernormal
profit.
Predatory pricing: where the price is set below average cost, and the giant
can cross subsidise or rely on investment whilst loss-making and outlast the
others. Tesco got accused of this in the mid 1990s. a very large firm may be
tired of smaller firms taking its market share so they set price very low for a
time to five rivals out.
Assumptions of a monopoly model:
There is only one firm in the market
There are very high barriers to entry/exit
The monopolist is therefore able to set the market price or the market
output, but not both. We sat the monopoly is a price maker.
The monopolist will choose to profit maximize and hence produce where
MC=MR. there will be a lack of close substitutes (if monopoly power is going
to be strong).
Monopoly diagram:
The profit maximizing monopolist produces at Q – where MC=MR. At Q, AR>AC
therefore the firm can earn supernormal profits in the short run. Supernormal profit
= the shaded rectangle. This represents the short and long run position because
barriers to entry prevent new firms from entering the market. Thus, the firm can
A monopolist is a single seller of a good or a single provider of a service.
A pure monopoly is a market structure where one company is the single supplier of a
product, and there are no close substitutes for the product available.
It is rare for a firm to have a pure monopoly – except when the industry is state-
owned and has legally protected monopoly.
The royal male used to have a statutory monopoly on delivering household mail. This
is changing fast as the industry has seen fresh competition.
Sources of Monopoly:
1. Barriers to entry – anything that prevents a new firm from entering the
market.
2. The number of firms in the market – as a rule, markets with few firms’ gives
the firms more monopoly power.
3. Importance of advertising – when brands are heavily advertised it makes it
harder for new products to take market share from more established brands.
4. Product differentiation – if a brand is perceived as ‘better quality’ then
producers will still be able to sell the product even at a price premium.
Barriers to entry:
A barrier to entry is anything that prevents new firms from entering the market.
Innocent (natural) barriers to entry – these exist merely as a by product of doing
business
Economies of scale: scale firms cannot reduce costs enough to compete with
larger firms.
Network effects: if you have a product which is only for use if others are using
it (consumers or producers) e.g. Facebook, twitter or air miles then it is very
hard to get people to switch to a new service.
Strategic (artificial) barriers to entry – barriers that have been set up by firms to
prevent others from entry.
Legal barriers: patents, intellectual property rights, copyright. For at least a
few years, an innovation has a monopoly; any other entrant is subject to legal
barriers to entry.
Advertising and development costs: sunk costs which firms deliberately incur
to try stand out from potential entrants and competitors. Firms must get
their products well known and keep up with others, only certain entrants can
achieve this.
Outlet location: if you can get your shop into somewhere like an airport, you
can get a lot of money, as there are many customers. However, the fierce
competition in such places means that only those who can get to such places
to survive.
, Pricing barriers (artificial) – firms can use pricing tactics as a barrier to entry
Limit pricing: one a firm has a share of the market, it wants to keep it. When
it hears of a potential competitor, it may lower the price to deter the
competition from setting up. The limit price is the minimum price a
monopolist could set which would allow a new firm to enter the market and
just earn normal profits. PL = Price limit. If the monopolist increases output
beyond Q, the price falls below PL so residual demand curve below AC, so a
new firm couldn’t make normal profits and won’t enter the market. A
monopolist could set a price below the limit price and still make supernormal
profit.
Predatory pricing: where the price is set below average cost, and the giant
can cross subsidise or rely on investment whilst loss-making and outlast the
others. Tesco got accused of this in the mid 1990s. a very large firm may be
tired of smaller firms taking its market share so they set price very low for a
time to five rivals out.
Assumptions of a monopoly model:
There is only one firm in the market
There are very high barriers to entry/exit
The monopolist is therefore able to set the market price or the market
output, but not both. We sat the monopoly is a price maker.
The monopolist will choose to profit maximize and hence produce where
MC=MR. there will be a lack of close substitutes (if monopoly power is going
to be strong).
Monopoly diagram:
The profit maximizing monopolist produces at Q – where MC=MR. At Q, AR>AC
therefore the firm can earn supernormal profits in the short run. Supernormal profit
= the shaded rectangle. This represents the short and long run position because
barriers to entry prevent new firms from entering the market. Thus, the firm can
