F583 Monopoly Market Structure

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Monopoly Types

Pure Monopoly - The firm is the industry, it is the only firm supplying the good that it produces with no close substitutes, the firm is therefore a price maker as it can control both the output and price within the industry.

Natural Monopoly - Agian facing very little competition and is the most efficient kind of monopoly, producing at the lowest point on the average cost curve.

Dominant monopoly - 40% market share within the industry

Legal Monopoly - 25% market share within the industry

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Monopoly Characteristics

  • High barriers to entry preventing new firms from entering, i.e. high sunk costs.
  • The firm is a price maker due to it's large market share.
  • Supernormal profits can be made in both the short and the long run due to the lack of competition
  • assymetric knowledge between the firms and the consumers.
  • Profit maximisers (common with most firms), they produce where MC=MR
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Monopoly Efficiency

The monopoly firm is not producing at the lowest point on its average cost curve and therefore can not be technichally or productively efficient. The firm does not need to focus on allocating its resources correctly due to the lack of competition in the industry, this means the firms will not be producing where price=MC. Monopoly firms do however have the potential to be dynamically efficient as they could re-invest the supernormal profit they create into research and development. Generally in a monopoly market, there will be an overall loss to consumer wellfare as consumer surplus is minimised and producer surplus is maximised. The increase in prices can also price some consumers out of the market if there income is too low, further decreasing the loss of wellfare, this loss is shown on the graph on the next card

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Monopoly Diagram


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Monopoly Price Discrimination

Price discrimination is where a firm can charge different prices for the same product in order to maximise revenue amongst other reasons. To do this a firm must be a price maker so price discrimination is not seen in perfectly competitive markets, or those with a particularly low concentration ratio. The firm must also be able to prohibit the re-sale of goods and seperate the market into those who will be paying more and those who will pay less. An example of price discrimination is in cinema's or some spectator sports, priices may be lower for children and higher for adults, cinema's can seperate the market by selling child's tickets and adults tickets that are not interchangeable. Price discrimination is done to increase the overall revenue that a firm can create, however it can also be used to offload exess capacity and to take market share away from other firms. This can be done by pricing certain groups of people into the market, if a group couldn't afford or weren't willing to pay a certain price before, price discrimination can give them access to the market and increase the demand. There are also ways that consumers can benfit from price discrimination. Primarily it will benefit those who get the product in question at a lower price, however some monopolies may also use the additional abnormal profit gained to cross-subsidise within the firm, allowing other less profitable but socially benefitial projects to continue.

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Monopoly Regulation

Generally a government will try and regulate the monopolies based within a country to a 25% market share and attempt to limit the loss to consumer wellfare. Regulating boards may attempt to control monopolies by attempting to introduce fresh competition in to the industry. Monopolies may also be reffered to these regulations boards if they are attempting a merger or takeover that would raise their market share above 25% (legal monopoly).

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