Monopoly Single seller – 100% of the market (may exert same market power with >25%) Barriers to entry keep competition to a minimum Firms control price (price setter) and earn super-normal profits Natural monopoly may exist in some industries Firms practise price discrimination

Barriers to Entry (a reminder): High Start-Up Costs Economies of Scale Limit Pricing Control of Outlets or Suppliers Brand Loyalty – sunk costs Patents, Copyrights, Licensing Natural monopoly characteristics (enormous infrastructure)

Monopoly – The Curves! Price £ MC AC P profit max AC AR = D MR Q profit max Quantity Profit maximising output is where MC = MR (once output is set, P determined by the demand curve) AC < AR (P) at profit maximising output Therefore, supernormal profits exist (however losses are possible if demand falls or costs rise)

Monopoly Efficiency   Allocative Efficiency Since P ≠ MC; (P>MC) Productive Efficiency Q is not at min AC. Dynamic Efficiency  Little incentive to decrease costs since price can be increased May choose to constantly improve to keep out potential competitors X-inefficiency Without competition, firms can become very bureaucratic & too management heavy – slowing things down

Natural Monopoly Price £ P profit max AC AC MC MR AR = D Q profit max Quantity AC falls constantly (constant increasing returns to scale due to high sunk costs) Profit max. output where MR = MC At Q profit max, P is determined by the demand curve P (AR) > AC, therefore supernormal profits

Price Discrimination Firms charge different prices to different groups of consumers for the same product (Eg. peak/off peak train fares, same clothes/different shop) Monopoly power must be great enough to not risk being undercut by rivals Must be able to prevent re-selling of product in 2nd hand market (arbitrage) Groups must have different elasticities of demand (the more inelastic, the higher the price)

Price Discrimination – The Curves Market A Market B Whole Mkt MC PA AC PB ARB MRB MR MRA ARA QA QB Q profit max Quantity P in each market is determined by the demand curve Q in each market is determined by where MC = MR Firms try to capture all the consumer surplus, turning it into producer surplus

Monopoly Bad Monopoly Good Consumers face higher prices & less choice (↓ consumer surplus & ↓ consumer welfare) Lower income consumers may be priced into the market by price discrimination Firms may have no incentive to innovate or become more efficient Large firms may be able to take advantage of Economies of Scale New market entrants may be stifled by monopoly power, reducing long-term progress Large firms may be more internationally competitive improving exports for the country

A note about shifting cost curves… Since MC is only related to variable costs, MC will only shift if VCs change So… If Fixed Costs change, shift only the AC curve If Variable Costs change, shift both AC and MC curves