Market failure: Monopoly

1. Market failure: Monopoly AS Economics Unit 1

2. Aims and Objectives Aim: • To understand the barriers to entry in a monopolistic market. Objectives: • All: Define a pure monopoly • All: Explain how pure monopolistic firms can restrict output and price fix. • Most: Analyse the barriers to entry in a monopolistic market. • Some: Evaluate the case of a monopoly.

3. Starter • In pairs decide on a definition of a Monopoly market. • To help you think about the objective of playing the board game monopoly. • 2 mins

4. Pure Monopoly Definition • A single firm produces the whole of the output of a market. • Faces no competition from other firms as there are no other firms in the market. • 100% market share

5. Pure Monopolistic Market • Competitive market. • Monopolistic firm enters the market. • In a pure monopolistic market the firm can restrict output (Q1-Q2). • Market equilibrium was (Q1-P1) • Therefore it can charge a higher price for it’s products to make higher profits. Price P2 P1 D Q2 Q1 Quantity

6. Non-Pure Monopoly Definition • A market which is dominated by one firm. • The firm owns more than 25% of market share.

7. Monopoly • An effective monopoly must be able to exclude rival firms from the market through barriers to entry (things which stop other firms entering a market) • A monopoly is strongest when it produces an essential good for which there is no substitutes or when demand is inelastic. .E.g. One firm producing bread/milk. (Unrealistic)

8. Barriers to Entry • Factors which prevent firms from entering a market. • In a monopoly barriers which exist are based on economies of scale.

9. Barriers to Entry A Monopolistic market

10. L: Limit and Predatory Pricing • The large monopolistic firms have the lowest costs in an industry. • Economies of scale. • Firm lowers it’s prices to a level where other firms cannot compete. • Driving them out of the industry. BACK

11. A: Advertising • Large firms can spread the costs of advertising, as they produce thousands of units. • New entrants to the market have to match that level of advertising expenditure but they cannot. BACK

12. M: Multiplicity of Brands • Large monopolistic firms can sell a large number of different products and brands. • Targets multiple areas of the market. • Therefore attracts more customers. • Tesco stocks 20 varieties of apple! BACK

13. I: Integration (combining two firms) • As monopolistic firms get larger they can integrate, with larger firms and smaller ones. • This enables them to use predatory pricing more effectively. • Economies of scaleget larger. BACK

14. N: Non Price Competition • Strategies to persuade customers to buy goods, without lowering prices. • Tesco Clubcard • 8 million users, most popular loyalty card in UK. • The greater the benefits for the customer, the more years that customer will remain loyal. BACK

15. B: Branding • Brands have unique characteristics. Built over many years. • Created through advertising. • Making demand more inelastic. BACK

16. R: Research and Development BACK • Increasing expenditure on R&D • Firms can produce products which give them the edge over their competitors. • Charge a higher price than their competitors.

17. Mini Plenary • Write down on your post it note the seven barriers to entry to monopolistic firms.

18. Plenary: Monopoly of French Taxi Drivers • http://www.bbc.co.uk/news/world-europe-13320358 • What barriers to entry do you feel the new French taxi drivers facing? (2 Marks) • Draw the diagram to show what has been occurring in the French taxi industry prior to this firm entering the market. (4 marks) • What may be the effects of a new firm entering this industry? (6 Marks)

19. Monopoly and market failure • Occurs because compared to the competitive market, output falls and the price rises, leading to under consumption of the good the monopoly produces.