Monopoly2
- 1. Market Structures: Monopoly Week 8
- 2. Barriers to Entry The Long run Barriers to entry: imply that a monopolist can still earn supernormal profits in the long run Define: Barriers to entry : Anything that prevents or impedes the entry of firms into an industry thereby limiting the amount of competition faced by the existing firm Forms of barriers to entry Economies of Scale Large scale of production leads to lower costs of production
- 3. Natural Monopoly The case of a natural monopoly Arises when the level of the quantity demanded only allows a single firm to benefit from economies of scale.
- 4. Barriers to entry Economies of Scope A firm producing a variety of products is likely to experience lower production costs Product differentiation and brand loyalty Ownership of, and control over wholesale or retail outlets Legal protection Patents Licences Aggressive tactics Price wars Massive advertising campaigns Attractive after sales service
- 5. Limit Pricing Limit pricing – monopolist charges a price below the short run profit-maximising level in order to deter new entrants. Barriers to entry of new firms are not total Very large supernormal profits attracts new potential entrants The monopolist deliberately keeps its price down thereby restricting profits This is done in order to discourage new entrants
- 7. Monopoly and public interest Disadvantages of a monopolist Higher price and lower output than under perfect competition Allocatively inefficient : P>MC X-inefficiency There is no pressure on profit margins hence cost control becomes lax Overstaffing Spending on prestigious buildings and equipment that do not enhance productivity
- 8. Advantages of a monopoly Economies of scale due to larger plant
- 9. Advantages Supernormal Profits allow research and development Increases efficiency and lower costs of production Competition for corporate control Inefficient monopolies face the risk of a take over bid from another company. Fear of being taken over by another firm may forces monopolies to be efficient
- 10. The Theory of Contestable markets Arises when barriers to entry are not total The mere threat of entry will have the same effect as actual competition.
- 11. Monopoly and the dead weight loss
- 12. Efficiency losses under monopoly Allocative inefficiency under monopoly Under perfect competition P=MC but under monopoly P>MC Productive inefficiency under monopoly In the long run perfect competition produces at the bottom of the ATC so P=min (ATC). Under the monopoly there is no pressure to minimise costs so that P = min (ATC) Deadweight loss