Monopoly

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Monopoly

• Some basic observations

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What is a Monopoly?

•  An industry where there is a single supplier of
  a good or service that has no close substitutes
  and in which there is a barrier preventing new
  firms from entering is a monopoly.  In practice
  the boundaries of an industry are arbitrary, and
  the determination of monopolies is along and
  costly business for institutions such as the
  Competition Commission.
• Different types if entry barriers exist
• Structural barriers (economies of scale)
• Strategic barriers (predatory pricing)
• Statutory barriers ( patents, licenses given by
  law)

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How Monopolies can develop

• Horizontal Integration. Where 2 firms join at the
  same stage of production, e.g. 2 banks such as
  TSB and Lloyds
• Vertical Integration. Where a firm gains market
  power by controlling different stages of the
  production process. A good example is the oil
  industry. Where the leading firms produce, refine
  and sell oil
• Legal Monopoly. E.g. Royal Mail or Patents
• Internal Expansion of a firm. Firms can increase
  market share by increasing their sales and
  possibly benefiting from economies of scale
• Being the First Firm e.g. Microsoft,

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Barriers to Entry

• Legal barriers e.g. law, license or patent
  restrictions.
• Natural monopoly e.g. a unique source of supply
  of a raw material or economies of scale
• Economies of scale.
• Production differentiation and brand loyalty.
• Ownership of wholesale and retail outlets.
• Mergers and takeovers.
• Aggressive tactics and intimidation

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Advantages of monopoly

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• Economies of scale and scope.
• Possibility of lower cost curves due to more
  research and development
• Innovation and newer products
• Potentially lower prices for consumers through
  economies of scale.

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Advantages of Monopoly
We can see here the Average cost curve is far
lower for monopolies than firms in a perfectly
competitive market, through the use of economies
of scale.
Lower cost on consumers
Because monopoly producers are often supplying
goods and services on a very large scale, they
may be better placed to take advantage of
economies of scale - leading to a fall in the
average total costs of production. These
reductions in costs will lead to an increase in
monopoly profits but some of the gains in
productive efficiency might be passed onto
consumers in the form of lower prices. The effect
of economies of scale is shown in the diagram
above.
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Disadvantages of Monopoly

• Lack of consumer choice
• High barriers of entry
• Exploitation- e.g Tesco place huge pressures on
  suppliers and can dictate to an extent the price
  at which they buy.
• Potentially higher pricing for consumers.