AS Economics Unit 1 MARKET FAILURE: MONOPOLY

Aim:  To understand the barriers to entry in a monopolistic market. Objectives:  All: Define a pure monopoly  All: Explain how pure monopolistic firms can restrict output and price fix.  Most: Analyse the barriers to entry in a monopolistic market.  Some: Evaluate the case of a monopoly. AIMS AND OBJECTIVES

 In pairs decide on a definition of a Monopoly market.  To help you think about the objective of playing the board game monopoly.  2 mins STARTER

 A single firm produces the whole of the output of a market.  Faces no competition from other firms as there are no other firms in the market.  100% market share PURE MONOPOLY DEFINITION

PURE MONOPOLISTIC MARKET Price Quantity Q1 P1 D P2 Q2 Competitive market. Monopolistic firm enters the market. In a pure monopolistic market the firm can restrict output (Q1-Q2). Market equilibrium was (Q1- P1) Therefore it can charge a higher price for it’s products to make higher profits.

 A market which is dominated by one firm.  The firm owns more than 25% of market share. NON-PURE MONOPOLY DEFINITION 25% Y X

 An effective monopoly must be able to exclude rival firms from the market through barriers to entry (things which stop other firms entering a market)  A monopoly is strongest when it produces an essential good for which there is no substitutes or when demand is inelastic..E.g. One firm producing bread/milk. (Unrealistic) MONOPOLY

 Factors which prevent firms from entering a market.  In a monopoly barriers which exist are based on economies of scale. BARRIERS TO ENTRY

LAM INB R A MONOPOLISTIC MARKET

L: LIMIT AND PREDATORY PRICING  The large monopolistic firms have the lowest costs in an industry.  Economies of scale.  Firm lowers it’s prices to a level where other firms cannot compete.  Driving them out of the industry. BACK

A: ADVERTISING  Large firms can spread the costs of advertising, as they produce thousands of units.  New entrants to the market have to match that level of advertising expenditure but they cannot. BACK

M: MULTIPLICITY OF BRANDS  Large monopolistic firms can sell a large number of different products and brands.  Targets multiple areas of the market.  Therefore attracts more customers.  Tesco stocks 20 varieties of apple! BACK

I: INTEGRATION (COMBINING TWO FIRMS)  As monopolistic firms get larger they can integrate, with larger firms and smaller ones.  This enables them to use predatory pricing more effectively.  Economies of scale get larger. BACK

N: NON PRICE COMPETITION  Strategies to persuade customers to buy goods, without lowering prices.  Tesco Clubcard  8 million users, most popular loyalty card in UK.  The greater the benefits for the customer, the more years that customer will remain loyal. BACK

B: BRANDING  Brands have unique characteristics. Built over many years.  Created through advertising.  Making demand more inelastic. BACK

R: RESEARCH AND DEVELOPMENT  Increasing expenditure on R&D  Firms can produce products which give them the edge over their competitors.  Charge a higher price than their competitors. BACK

 Write down on your post it note the seven barriers to entry to monopolistic firms. MINI PLENARY

PLENARY: MONOPOLY OF FRENCH TAXI DRIVERS

 Occurs because compared to the competitive market, output falls and the price rises, leading to under consumption of the good the monopoly produces. MONOPOLY AND MARKET FAILURE