Monopoly
Diagram on monopoly power, the growth of firms, conditions required, price setting power, the survival of small firms and equity
- 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
- As there are no substitutes for the product, the monopolist is likely to face an inelastic demand curve
- 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
- In markets such as gas and electricity, consumers are often reluctant to switch providers because of the time and effort involved
- 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
- This can result in firms charging higher prices if those consumers do not know they can do better elsewhere
- 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
- Motivations for external growth include the desire to acquire greater market share and therefore power
- Firms can grow internally
- They expand their operations and perhaps diversify into new products
- Firms can grow externally through mergers and takeovers
- 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
- Horizontal integration
- 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
- Niche marketing
- 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
- Monopoly firms enjoy price making/setting power
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