Diagram on monopoly power, the growth of firms, conditions required, price setting power, the survival of small firms and equity

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  • Created by: Clodagh
  • Created on: 22-04-14 14:15
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  • Monopoly
    • Monopoly firms enjoy price making/setting power
      • As there are no substitutes for the product, the monopolist is likely to face an inelastic demand curve
        • Inelastic demand suggests that the demand for a good will remain high irrespective of price
        • Total revenue rises and so does profit
      • In order to raise price, monopolists must restrict the quantity supplied
    • Monopoly can be argued to contribute to unfair outcomes
      • The consumer is faced by a lack of choice
      • The monopolist is seen to use their price making powers at the expense of the consumer (exploitation)
    • There are benefits that a monopoly could bring to the market
      • Monopolies often achieve large economies of scale, allowing the monopolist to produce at a lower price and at a higher output
      • Monopolists add to dynamic efficiency. Profits help fund research and development, leading to innovation
        • However, lack of competition could may reduce incentive to innovate
    • DEFINITION: A firm that enjoys a 25% market share
      • An example of a pure monopoly is a regional water firm
    • Factors contributing to monopoly power
      • High market concentration
      • Product differentiation: where a firm had been able to differentiate its product or to create desirable image characteristics (branding)
        • This helps create consumer loyalty and reduce PED. Clothing is a good example
      • Consumer inertia
        • In markets such as gas and electricity, consumers are often reluctant to switch providers because of the time and effort involved
          • This reduces the elasticity of demand
      • Imperfect knowledge
        • This can result in firms charging higher prices if those consumers do not know they can do better elsewhere
          • It can be difficult for customers to gain the information needed for price comparisons
      • High entry barriers contribute to price making power by reducing the possibility of new entry in the event that a firm makes supernormal profit
    • The growth of firms
      • Firms can grow externally through mergers and takeovers
        • Motivations for external growth include the desire to acquire greater market share and therefore power
          • This may allow firms to achieve economies of scale, to acquire valuable brand names or to gain greater control of the supple chain
      • Firms can grow internally
        • They expand their operations and perhaps diversify into new products
    • The development of monopolies
      • Horizontal integration
        • Where two firms join at the same stage of production in the same industry. For example two car manufacturers merge
      • Vertical integration
        • Where a firm develops market power by integrating with the different stages of production in an industry
      • Franchises and licences
        • These give a firm the right to operate in a market - and are usually open to renewal every few years
      • Internal expansion of a firm
        • Firms can generate higher sales and increase market share by expanding their operations and exploiting possible economies of scale
      • Creation of statutory monopoly
        • Some key firms such as regional water companies are given monopoly power
    • Survival of small firms
      • Niche marketing
        • Small firms often produce specialised products where consumer demand is inelastic
      • Quality of service
        • Excellent customer relations can be important in helping small firms survive
      • Innovation
        • Highly innovative firms have an excellent chance of survival and may grow larger
      • Internet reatiling
        • Small firms can dramatically reduce the fixed costs of running a business
    • Price discriminating monopoly
      • Price discrimination occurs when a firm charges different prices to different groups of consumers for an identical good or service
      • Conditions
        • There must be a different PED for the product from each group of consumers
        • The firm must be able to stop market seepage
          • This occurs when consumers purchasing the good at a lower price resell it to those customers who would have paid the higher price
        • The monopolist must have price making power
      • Evaluation
        • Consumer surplus is often reduced and so there is a loss of consumer welfare
        • In most cases the price is greater than marginal cost and therefore firms are not achieving allocative efficiency
        • The profits made in one market may allow firms to cross-subsidise loss making activities/services that have important social benefits


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