Monopoly & Monopoly Power | AQA A Level Economics Revision Notes 2017

Characteristics of Monopoly

A monopoly is a market structure in which there is a single seller
There are no substitute products
The firm has complete market power and is able to set prices and control output
- This allows the firm to maximise supernormal profit in the short-run
- There is no long-run erosion of supernormal profit as competitors are unable to enter the industry
High barriers to entry exist
- One of the main barriers is the ability of the monopoly to prevent any competition from entering the market
  - E.g. By purchasing companies who are a potential threat
The UK Competition & Markets Authority defines a monopoly as any firm having more than 25% market share
- It acts to prevent this from happening in most industries

As a single seller of goods/services, the firm in a monopoly market is also the entire market
- There is no differentiation between the firm and the industry
It is a price maker
- This means that its revenue curves are downward sloping
In order to maximise profits, it produces at the point where marginal cost (MC) = marginal revenue (MR)

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The firm makes supernormal profit in the short-run & long-run as the AR > AC at the profit maximisation level of output (Q₁)

The firm produces at the profit maximisation level of output, where MC = MR (Q₁)
- At this level, AR (P₁) > AC (C₁)
- The firm is making supernormal profit $= (P_{1} - C_{1}) \times Q_{1}$

In several instances where the Competition & Markets Authority has acted to decrease/limit monopoly power, the firms have taken the Regulator to court in an attempt to convince them that the firms market power will benefit consumers
- Theoretically, this is possible. However, in many cases the desire to maximise profits would prevent this from happening

Evaluating Monopoly Power

Stakeholder

Advantages

Disadvantages

The Firm

Supernormal profits generate money for continued investment in technology and product innovation
Market power enables the firm to increase its global competitiveness
Economies of scale can increase, thereby lowering the average cost
Producer surplus increases
Price discrimination can increase revenue

Due to a lack of competition, there is a reduced incentive to be efficient
Cross subsidisation can create inefficiencies
Monopolies lead to a misallocation of resources as P > MC. The price is above the opportunity cost of providing the goods
Due to a lack of competition, innovation sometimes lacks effectiveness

Employees

Having only one supplier in the industry limits the opportunity to change employers

Consumers

Product innovation due to the firm's supernormal profits may result in a better-quality product
Cross subsidisation can lower prices on some products that the firm provides
Prices may fall If firms pass on their cost savings (due to economies of scale) in the form of lower product prices

A lack of competition is likely to result in higher prices as no substitute goods are available
A lack of competition may result in no product innovation & worse product quality over time
May experience worse customer service as the incentive to improve it is limited
Cross subsidisation is likely to increase prices on some products offered by the firm e.g. Champagne prices
Consumer surplus decreases

Suppliers

Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally

There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers (monopsony power)
This price may not be profitable in the long run