Chapter 10 Monopoly

Characteristics of Monopoly Sole supplier in the industry Controls either price or quantity supplied Maximises profit Barriers to entry

What Are the Barriers to Entry? Legal/statutory monopoly Ownership of a patent/copyright Ownership of raw materials Economies of scale/large capital investment Cartels/collusion Mergers/takeovers Fear/threats/force Brand proliferation

Demand Curve Facing a Monopolist The monopolist faces a normal downward sloping demand curve indicating an inverse relationship between price and quantity demanded. The demand curve is also known as the average revenue curve. When AR is reduced to sell more output, marginal revenue will be lower than AR.

Perfect Competition and Monopoly Compared Efficiency Price Output Profits Demand curve

Advantages of Monopoly as a Market Structure Economies of scale Guarantee supply of product/service Secure employment Reduced use of scarce resources Potential for innovation/R&D

Disadvantages of Monopoly as a Market Structure Exploitation of consumers Inefficient use of scarce resources Produce fewer goods at a higher price than perfect competition Less efficient/innovative

Who Regulates Monopolies? Competition Act 2002: Monopolies Division Cartels Division Mergers Division Note: Deregulation is the removal of government controls from an industry or sector to allow for a free and efficient marketplace and could affect consumers, employees and companies.

How can state companies that are often cited as being inefficient achieve greater productivity? Deregulation of their market Appointing experienced entrepreneurs with proven business records to state boards may bring a different ‘value for money’ attitude that would increase profits and eliminate wasteful practices A profit motive and performance-related remuneration Allow the companies to form strategic alliances, e.g. Aer Lingus and JetBlue

How can state companies that are often cited as being inefficient achieve greater productivity? (Continued) Discontinue unprofitable services Privatisation If political appointments are made, they should be based solely on the skills and knowledge that are needed for the industry An absence of government interference in the day-to-day operations and management of the company, as a different skillset needs to be employed in running a business

Benefits of Privatisation Lower prices A better service Revenue from the sale benefiting government finances

Drawbacks of Privatisation The loss of unprofitable services The deterioration of standards Overseas buyers may become owners of previously owned national assets, which could see control going out of the state