JENNIE HARRINGTON

Monopoly

Monopoly Assumptions

One firm is the industry One firm exists within the industry so there is no distinction

between the firm and the industry. Controls price or output

A firm can control price or output but not both If it sets the price, the output produced will be determined by

consumers If it sets the output the price will be determined by the market

Profit maximisation It is possible for the firm to earn SNP’s in both the short run

and the long runBarriers to entry

If a monopoly market structure is to continue into existence into the long run there cannot be freedom of entry and exit.

Relationship between AR and MR

Quantity AR TR MR

1 €10 €10 -

2 €9 €18 €8

3 €8 €24 €6

4 €7 €28 €4

5 €6 €30 €2

The relationship between AR & MR

MRAR

P

Q

There is no distinction b/w The firm and the industry as thereIs only one firm in the industry.In order to sell more of its productsThe firm will have to decrease itsAR. MR decreases at a faster rateThan AR and it is less than AR

Long Run Equilibrium

AC

Long Run Equilibrium for a firm in Monopoly

Equilibrium Occurs at pt _, where MC = MR, MC is rising

Price/ Output The firm produces Q1 and sells it at P1

Profits AR>AC, SNP’s are being earned in the box _______.

They can continue to exist due to barriers to entry

Costs The cost of producing the output is shown at pt __. The

firm is not producing at the lowest point on the AC curve. Hence, the firm is wasting scarce resources/ inefficiency

Barriers to entry

Legal/ Statutory Monopoly Other firms may not be allowed into the industry because the

government confers on a firm the sole right to supply a particular good or service I.e. Aer Rianta

Ownership of a patent/ copyright If a firm has the sole right to a manufacturing process then no

other firm can compete with it. Other firms are not allowed to use this patent until the time period has expired

Sole right to raw materials/ Natural monopolies A firm may have complete control over the source of essential raw

materials I.e. an oil drilling company Large capital investment

In some industries the minimum size of a firm required to operate efficiently is so large that there is no room for competitors once one firm has established itself.

Trade agreements/ collusion – cartels By entering trade agreements with other firms, a firm can share

out the market so that no competition exists within its segment of the market

Mergers/ takeovers A firm may ensure their survival by merging/ taking over other

(rival) firms in the same line of business – such that it becomes a monopolist and no competition exists within the industry

Monopolies based on fear, force or threats An individual/ firm may stop other individuals/ firms providing

similar goods/ services by threats/ force instilling fear into potential entrants I.e. the supply of illegal drugs

Brand proliferation A firm may gain monopoly power if through its advertising

consumers are convinced that there is no suitable alternative to their particular brands

Advantages of Monopoly

Economies of scale Production on a large scale may help the firm benefit from

economies of scale and these cost savings may be passed on to the consumer in the form of ______________

Employment may be more secure with monopoly. A monopolist may be less

vulnerable to changes in the level of demand in the market as it earns SNP’s., Also employees may benefit ________________________________________________________________________________________________________

Guarantee supply of product/ service The supply of a product may be guaranteed and provided where

profit is minimal so consumers benefit e.g. _____________________________

Reduced use of scarce resources ___________________________________________________

Potential for innovation ____________________________________________________

Disadvantages of Monopoly

Cost: the monopolist will seldom produce at the__________ point on the

AC curveProfits:

___________ are being earned indicating that the consumer is being exploited (AR> AC)

Consumer has no ______– as there are no other producers of the product

A monopolist may be able to practice price discrimination Where a good is sold to different consumers at different prices

where the price difference is not due to difference in the cost of production

Monopolists can control either the_______ it sells at or the __________ it will supply. The monopolist will usually cut its production level to increase the price of the good, thus under utilising its resources

Make suggestions as to how semi-state companies which are monopolists can be made

more cost effective

Avoid any gov. interference in the day to day running of the company.

Introduce competition in that particular industry by introducing deregulation. Competition normally encourages cost efficiency.

Introduce a profit motive for the mgt team. Appoint experienced entrepreneurs and highly

qualified people as members of the BOD. This replaces people being appointed solely for their allegiance to a particular political party and who may not have any business experience/ knowledge.

Comparing LR Perfect Competition and Monopoly

Price/ Output PC M

Profits PC M

Cost PC M

Do consumers fare better if a product is produced under conditions of monopoly or

PC – explain..

Profit

Price

Cost

Are employees better off working in a perfectly competitive industry or in a

monopolistic industry?