Monopoly

Monopolies:

A pure monopolist is a single seller of a product in a given market or industry. In simple terms this means the firm has a market share of 100%. 

A monopolist is able to make abnormal profits in the long run as "Barriers to entry" exist.

The monopolist faces a downwards sloping demand curve, it can therefore set price or quantity, but not both. The demand curve would be relatively price inelastic as the monopolist does not face competition, but of course this would depend upon the type of product it is selling. For example if you had a monopoly on drinking water, the demand curve would be steeper than if you had a monopoly on hamburgers.

A monopoly can make abnormal profits in the long run but you should also understand that it could also just make normal profits in the long run (although this is statistically improbable). It is also possible for a monopolist to make a loss in the short run.

Monopolies and Barriers to entry:

 Entry Barriers in Markets

Natural Monopolies 2018

 It is often said that a natural monopoly raises difficult questions for competition policy because 

• On the one hand – it is more productively efficient for there to be one dominant provider of a national infrastructure e.g. a rail network or electricity generating system 

• Natural monopolies often require enormous investment spending to maintain and improve the networks e.g. who is going to pay for making our water network better, our internanet  faster, and our rail-network safer

• On the other hand – businesses with such deep-rooted monopoly power (huge barriers to entry) might be tempted to exploit that market power by raising prices and making huge supernormal profits – damaging consumer welfare.

Options for competition policy in industries that resemble a natural monopoly 

1. Nationalization: Bringing some of these industries into state ownership 

 2. Price controls:  For many of the major UK utilities, the government introduced industry regulators to oversee these businesses when they were privatized in the 1980s and early 1990s . For many years utility businesses such as British Telecom and British Gas were subject to price capping

3. Introducing competition into the industry -this has been a favoured policy . Basically involves separating out infrastructure from the final service to the consumer – for example British Telecom was eventually forced to open-up local telecom exchanges and allow other businesses in to install equipment (unbundling the local loop) – who then sell services such as broadband to households – competitors pay BT an access charge designed to give BT a 10% rate of return from running the network . National Rail runs the network – but train operating companies have to bid for the franchise to run passenger services – and the industry regulator can take their franchise away if the quality of service isn’t good enough  Increased competition between gas and electricity suppliers

Monopolies and efficiency 

Static Efficiency 

This looks at how efficient firms are in their present situation.

Static efficiency focuses on how much output can be produced now from a given stock of resources, and whether producers are charging a price to consumers that fairly reflects the cost of the factors used to produce a good or a service. There are two main types of static efficiency-allocative and productive efficiency. 

Allocative Efficiency

Allocative efficiency occurs when the value consumers place on a good (reflected in the price people are willing and able to pay) equals the cost of the resources used up in production. The condition required is that  price = marginal cost. 

Productive Efficiency

Productive efficiency refers to a firm's costs of production and can be applied both to the short and long run. It is achieved when the output is produced at minimum average total cost (AC). For example we might consider whether a business is producing close to the low point of its long run average total cost curve. When this happens the firm is exploiting most of the available economies of scale. Productive efficiency exists when producers minimise the wastage of resources in their production processes. 

Dynamic Efficiency : 

This attempts to answer the question "will firms become more efficient in the future?"

It is an important concept and focuses on changes in the amount of consumer choice available in markets together with the quality of goods and services available. It could be argued that large firms could be dynamically efficient as they can use abnormal profits to undertake research and development of new improved goods and services. However due to a lack of competition it is often argued that they may be dynamically inefficient or “X-inefficient” 

Monopoly and Economic Efficiency 

Monopolists earn abnormal profits at the expense of economic efficiency. Price is higher than both marginal and average costs and, as a result, neither allocative nor productive efficiency is achieved. 

On the diagram below we see the monopolist maximising profits at q1, but where is the allocative efficient output? Where is the productively efficient output?

A Comparison between Monopoly and Perfect Competition 

The conventional view when comparing price and output under both pure monopoly and perfect competition is that a monopolist will produce a lower output at a higher price than a competitive industry. 

Potential Benefits from Monopoly 

A monopolist might be better able to exploit economies of scale. In this scenario, consumers actually benefit from a monopoly. Consumers may pay a lower price. 

Copy the diagram from Dorton P110 and explain why consumers end up paying a lower price with a monopoly than they would if the industry was perfectly competitive. 

Supporters of monopolies argue that consumers can benefits in other ways. As firms are able to earn abnormal profits in the long run there may be a faster rate of technological development that will reduce costs and produce better quality products for consumers. This is because the monopolist will invest profits into research and development to promote dynamic efficiency. 

Natural Monopolies –are they in the Public Interest? 

 A natural monopoly is allowed when total market demand is most economically and efficiently satisfied by a single producer and where competition results in duplication and wasted capital investment. But they still need to be regulated.

X Inefficiencies under Monopoly? 

An opposing argument to the case for a monopoly is that the lack of competition gives a monopolist no incentive to invest in new ideas or consider consumer welfare. It can also be argued that even if monopolist benefits from economies of scale they will have little incentive to control costs and 'X' inefficiencies will mean that there will be no real cost savings. Critics also highlight the fact that even if economies of scale lower prices for consumers, the price charged is still above marginal costs and allocative inefficiency exists.

Finally monopolists can price discriminate- which can benefit both producers and consumers, and turn a loss making industry into a profitable one- see price discrimination webpage