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Monopoly

Monopoly. Some basic observations. What is a Monopoly?.

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Monopoly

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  1. Monopoly Some basic observations

  2. 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)

  3. 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,

  4. 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

  5. Advantages of monopoly • 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.

  6. 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.

  7. 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.

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