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Monopoly

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by

Miss Cummins

on 25 August 2017

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Transcript of Monopoly

Monopoly
Sources of Power/
Barriers to Entry

Demand Curve Facing a Monopolist
Normal, downwards sloping
Inverse relationship between P&Q
D = AR
When AR is reduced to sell more output, then MR will be lower than AR
Characteristics
Sole supplier in the Industry
Only one firm, supplies entire output
Don't distinguish between the firm and the industry
Who Regulates Monopolies???
Competition Act 2002
Perfect Competition and Monopoly
Efficiency
Ms Cummins
Maximises Profit
Produces where MC=MR
MC rising faster than MR
Objective is to earn max profit so monopolisit may earn supernormal profits
Controls either Price or Quantity Supplied
Cannot control both
Iarnrod Eireann can control price of tickets but not how many people buy them
It could also supply a certain quantity but can't make the public buy them at the set price
Barriers to Entry
No other firms - supernormal profit
This occurs in both short and long run
Legal/Statutory Monopoly
Government may confer the sole right to produce a good/service to one firm
Passing of laws that prohibit other companies competing with the monopoly
Avoids unnecessary waste or duplication of services
Imagine another railway company???
Ownership of a Patent/Copyright
If a firm has sole rights to manufacturing process, no other company can produce until patent expires
Ownership of Raw Materials
Benefits firms
Encourages R&D
Company may have complete control over essential raw materials
Hence has monopoly power
Economies of Scale/Large Capital Investment
A company is prohibited from low unit costs of production and can't compete with the established company
If an industry requires a large capital investment, this many discourage entrants
Sometimes economies of scale is essential
Cartels/Collusion
This ensures no competition exists
Firms may enter into trade agreements with similar countries and divide up the market
Mergers/Takeover
Company may gain monopoly power by merging with or taking over a rival company
This eliminates the competition
Brand Proliferation
Some firms achieve monopoly power through aggressive advertising/branding
This creates the perception that consumers don't have any alternative
P
Q
AR = D
MR
Price Quantity TR AR MR
10
9
8
7
1
2
3
4
10
18
24
28
10
9
8
7
-
8
6
4
This shows that when AR (price) is dropped, more goods are sold and MR will be lower than AR
Monopolists make inefficient use of our scare resources - doesn't produce at lowest point of AC

Perfect competition - produce at lowest point of the AC curve
Price
Monopolist charges higher price than perfectly competitive firm
Perfect competition - Price equals MC
Monopoly - Price is greater than MC
Output
Monopolist produces smaller out put than perfect competition
Profits
SNP is earned by the monopolist (AR>AC)
Normal profit earned in perfect competition (AR=AC)
Demand Curve
Monopoly - downwards sloping demand curve
Perfect comp - horizontal demand curve
Imperfect Competition and Monopoly
Imperfectly competitive firms earn SNP in the SR only, normal profit in the LR
Monoplist earns SNP in both LR and SR
Both markets price is greater than M - more of the goods could be produced
Neither produces at lowest point of AC curve - wasteful of resources
Both face downwards sloping demand curve - price must be lowered to increase quantity demanded
Advantages of Monopoly
Economies of scale
Large scale, cost saving, cheaper for customers

Guaranteed Supply of Product/Service
Sometimes sold at low profit margins - consumers benefit
Might not be provided by private enterprise - regular bus services to remote areas
Secures Employment
No competition, employees have great security of tenure, better conditions of employment
Advantages of Monopoly
Reduces use of scare resources
Less duplication of resources
Less need for competitive advertising, no wasting
Some services - one provider (Irish Rail)

Potential for innovation/ R&D
Profits could be used for investment and R&D
Improves product and lowers costs in LR
Investors need patent protection
Disadvantages of Monopoly
Exploitation of Consumers
SNP earned - monopolists can abuse position by pushing prices
Inefficient use of scare resources
Doesn't produce at lowest point of AC curve but where MC=MR
This is due to lack of competition and waste of resources

Production of fewer goods at a higher price than perfect competition
Two companies in perfect competition - similar cost conditions
Monopolist will produce lower quantity at a higher price than perfectly competitive firms
Less Efficient/Innovative
Sometimes Monopolies become less efficient over time
They have dominant position - no competition - may not bother with R&D
Competition Authority
Independent statutory body
Enforces Irish and European competition law
Seeks to ensure that competition works for the benefit of all consumers/businesses who buy products and services in Ireland

How does their work prevent firms from abusing their monopoly power??
Monopolies Division
Investigates agreements that have anti-competitive effects but are not considered cartels - agreements between manufacturers and distributors of their products OR between distributors and retailers
Also investigate where there is an abuse of a dominant position - exploiting position to stifle competition or attempting to eliminate competitors or prevent new competitors from emerging
These can sometimes be anti-competitive and be in breach of the Competition Act 2002
Cartels Division
Involved parties can be prosecuted
Price fixing, market sharing, limiting production and bid rigging are all illegal
Illegal agreement between two or more competitors not to compete with each other

Involves a secret conspiracy - usually to make more profit at the expense of the consumer
Mergers Division
This Authority has the power to clear mergers, clear mergers with condition and block mergers if they find it will greatly reduce competition
Lessons competition - consumers suffer
Some mergers may have negative effect on consumers - increase in price/lower output
Businesses may join together to restructure in order to compete and prosper
Deregulation of Markets
What is deregulation?
Deregulation is the removal of government controls from an industry or sector to allow for a few and efficient market place
Examples: the airline industry, the taxi industry and the supply of electricity
Deregulation affects consumers and employees in the following ways:
Consumers
Employees
Profits
Increased competition
Full transcript