Market structure: characteristics of a market which can affectbehaviour of businesses & also affect the welfare of consumers.
- The number of firms in the market
- The market share of the largest firms
- The nature of production costs in the short and long run e.g. the ability of businesses to exploit economies of scale
- The extent of product differentiation i.e. to what extent do the businesses try to make their products different from those of competing firms?
- The price and cross price elasticity of demand for different products
- The number and the power of buyers of the industry’s main products
- The turnover of customers - this is a measure of the number of consumers who switch suppliers each year and it is affected by the strength of brand loyalty and the effects of marketing. For example, have you changed your bank account or your mobile phone service provider in the last year? What might stop you doing this?
What is a monopoly?
- A pure monopolist in an industry is a single seller. It is rare for a firm to have a pure monopoly – except when the industry is state-owned and has a legally protected monopoly.
- A working monopoly: A working monopoly is any firm with greater than 25% of the industries' total sales. In practice, there are many markets where businesses enjoy some degree of monopoly power even if they do not have a twenty-five per cent market share.
- An oligopolistic industry is characterised by the existence of a few dominant firms, each has market power and which seeks to protect and improves its position over time.
- In a duopoly, the majority of sales are taken by two dominant firms.
How monopolies can develop
Monopoly power can come from the successful organic (internal) growth of a business or through mergers and acquisitions (also known as the integration of firms).
- Horizontal Integration
This is where two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge, or a leading bank successfully takes-over another bank.
- Vertical Integration
This is where a firm integrates with different stages of production e.g. by buying its suppliers or controlling the main retail outlets. A good example is the oil industry where many of the leading companies are explorers, producers and refiners of crude oil and have their own retail networks for the sale of petrol and diesel and other products.
- Forward vertical integration occurs when a business merges with another business further forward in the supply chain
- Backward vertical integration occurs when a firm merges with another business at a previous stage of the supply chain
Barriers to Entry
Barriers to entry are the means by which potential competitors are blocked. Monopolies can then enjoy higher profits in the longer-term. There are several different types of entry barrier – these are summarised below:
- Patents: Patents are legal property rights to prevent the entry of rivals. They are generally valid for 17-20 years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes. Owners can sell licences to other businesses to produce versions of their patented product.
- Advertising and marketing: Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. Advertising can also cause an outward shift of the demand curve and make demand less sensitive to price
- Brand proliferation: In many industries multi-product firms engaging in brand proliferation can give a false appearance of competition. This is common in markets such as detergents, confectionery and household goods – it is non-price competition.
Monopoly, market failure & government intervention
Should the government intervene to break up or control the monopoly power of firms in market?
The main case against a monopoly is that it can earn higher profits at the expense of allocative efficiency. The monopolist will seek to extract a price from consumers that is above the cost of resources used in making the product. And higher prices mean that consumers’ needs and wants are not being satisfied, as the product is being under-consumed. Under conditions of monopoly, consumer sovereignty has been partially replaced by producer sovereignty.