Monopoly - Edexcel Unit 3

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Harry Bindloss
The legal definition of a monopoly is a firm that has over 25% market share. If this is the
case the Competition Commission (CC) can investigate it. However, the textbook definition
of a monopoly known as pure monopoly is where there is a single supplier in the market.
Monopoly: A market in which there is a single supplier. In practice this is unusual because in
most markets there are alternatives of substitutes.
A single seller in the market.
Perfect barriers to entry ­ factors that make it difficult or impossible for firms to enter
an industry and compete with existing producers. Perfect barriers imply other firms
cannot enter the market.
Long run and short run supernormal profits.
How the market operates:
Monopolists have a large influence over the price they charge (known as price-makers), as it
is only they who provide the good. A monopolist can decide either price or output, but not
both. Therefore under a monopoly prices tend to be higher and quality lower than if there
was competition. In this way monopolists can make very high profits. However if prices are
too high and quality too low then there will be no demand for the products. As monopolists
do not have to keep prices competitive and costs low, innovation and efficiency may be
poor in the industry. There is little incentive to innovation to reduce costs and price if the
firm is not trying to beat the competition.

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Harry Bindloss
Monopolists are effectively the industry. Monopolies have to minimise costs to therefore
maximise profits. However they may experience diseconomies of scale.
Monopolists tend to erect barriers to entry to stop other firms from entering the market.
Market barriers ­ Advertising and branding can create such a strong brand image and
brand loyalty that other firms find it all but impossible to enter the market and
successfully gain custom.…read more

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Harry Bindloss
1. Tax abnormal profits
­ The tax can then be redistributed throughout society.
­ However, reduces the incentive to then make it
­ Tax is insignificant to the monopolies
­ There are internal things they could do to get around it.
2. Price Controls
Impose a maximum price set to MSC. The regulatory bodies of the privatised utilities
do this. However, there is still the problem of knowing exactly where the bost and
revenues curves are and therefore where Q is.
3.…read more

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Harry Bindloss
2. Natural monopolies ­ Natural monopolies exist in an industry where not even one
single producer can exploit all available economies of scale. Therefore the larger the firm
the more cost advantages it can exploit. In a competitive market firms are smaller and
costs are higher. Large monopolists can exploit all available economies of scale and
therefore have lower costs.
3.…read more

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Harry Bindloss
Price fixing ­ at a high level reduces consumer surplus
Artificial barriers to entry ­ new entrants and unable to compete with high
advertising costs for example.
4. Equity problems ­ there are other aspects of monopoly besides efficiency losses
Negative externalities
Equity - unfairness in the distribution of income
The Natural Monopoly
A type of monopoly that exists as a result of the high fixed or start-up costs of operating a
business in a particular industry.…read more

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Harry Bindloss
monopsonist can exploit their bargaining power with a supplier to negotiate lower prices.
The reduced cost of purchasing inputs increases their profit margins. Monopsony exists in
both product and labour markets.
For example, National rail in the UK dominates the market for purchase of rail track
maintenance. Monopsonist may have a variety of business objectives but it is assumed that
they are just profit maximises. This will mean that they aim to minimise costs by paying their
suppliers the lowest possible price.…read more



This is a 6 page summary on monopolies including the diagrams, pros and cons, methods of dealing with and monopsony. A good summary.

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