1. Monopolies diagram lesson!

2. How close to the money are you?
Anything ‘unique’?
What can you remember from last lesson.
Use your post-it notes to show your amazing memory.
The more original the better!
Anything vital that’s been forgotten?
What’s the key memories?

3. Monopoly power
Need to know this
Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry
Influencing prices
Influencing output
Erecting barriers to entry
Pricing strategies to prevent or stifle competition
May not pursue profit maximisation – encourages unwanted entrants to the market
Sometimes seen as a case of market failure

4. Monopoly Vital revision Origins of monopoly:
Natural monopoly – usually on a network or grid… wasteful to duplicate!
Geographical factors – where a country or climate is the only source of supply of a raw material…quite rare. However, consider a single grocery store in a isolated village…
Government created monopolies – now sold off!
Through growth of the firm
Through amalgamation, merger or takeover
Through acquiring patent or license
Through legal means – Royal charter, nationalisation, wholly owned plc
Idea – give them a page of images/ scenarios to identify the ‘origins’ of the monopoly.

5. Identify the source of ‘monopoly’ power.
Thames Water – natural
O2 exclusive contract for new palm pre & Apple Iphone on contract / network
Apple Ipod – 80% market share

6. Identify the source of ‘monopoly’ power.
Natural
Geographical
Govt created
Co growth – EoS mergers etc
Patent / licence
Other
London Underground
O2 – iphone
BAA
Royal Mail
Microsoft
Bank of England
i-phone
i-tunes
De beers diamonds
Motorway service station
Thames Water

7. Identify the source of ‘monopoly’ power.
Natural
Geographical
Govt created
Co growth – EoS or mergers etc
Patent / licence
Other
London Underground 
O2 – iphone
BAA
Royal Mail
Microsoft
Bank of England
i-phone
i-tunes
De beers diamonds
Motorway service station
Thames Water

8. A natural monopoly?
Why does it make no sense to have a 2nd channel tunnel?
Despite being a natural monopoly, what competition does the firm face?

9. Label one side
HIGH
The other
LOW

10. Monopoly characteristics
Price
Efficiency
Innovation
Collusion
Promotion
Would you predict these to be HIGH or LOW?

11. Monopoly characteristics
Diagrams next lesson
Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination possible.
Efficiency – could be inefficient due to lack of competition (X- inefficiency) or…
could be higher due to availability of high profits
Innovation - could be high because of the promise of high profits, Possibly encourages high investment in research and development (R&D). Could be low as there is no incentive to reduce costs.
Collusion – possible to maintain monopoly power of key firms in industry
High levels of branding, advertising and non-price competition

12. BAA break up of monopoly
Further reading

13. How can a monopoly establish it’s position?
Known as barriers to entry….
Economies of scale
Patent protection
Information advantage (not sharing its trade secrets!)
Government protection
Control of resources
Can you think of any businesses that have these characteristics that generates ‘monopoly’ like power?

14. How can a monopoly establish it’s position?
Economies of scale – Microsoft!
Patent protection – drugs (anti aids)
Information advantage (not sharing its trade secrets!) – Coca cola, Worcester sauce, Microsoft & Iron bru! (not a monopoly though)
Government protection – (Kenya require new competitors to 1st get a ‘no objection’ letter from existing firms! E.g mobile phones – Telkom until 2002 was the only mobile network in African continent)
Control of resources – De beers diamonds in Africa 60% global sales!

15. Monopoly revenue diagram
You will be drawing these in YOUR OWN NOTES…
As you need the practice.

16. Revenue curves of a monopoly
AS Micro theory review!
Straight line D curve
Revenue curves of a monopoly
The monopolist can influence prices, so faces a downward facing Demand curve.
As the price maker, it can choose the location of price along the Demand curve
Get them to copy this into their notes – need the practice of drawing it!

17. Revenue curves of a monopoly
So why would the monopolist might choose to locate its price at unitary elastic point?
Look at the MR & TR position!
Note the relationship between MR & AR. MR has exactly twice the slope of the AR curve.
MR is ZERO at the maximum point of Total revenue

18. Profit orientated Monopoly diagram…
Vital diagram!
Profit orientated Monopoly diagram…
A monopolist wishing to maximise profits will produce at point where
MR = MC
Get them to copy this into their notes – need the practice of drawing it!

19. as the profit maximising position?
So why does MC = MR
as the profit maximising position?

20. The profit maximising level of output
Another diagram to learn!
Get them to copy this into their notes – need the practice of drawing it! They did look at this in summer term!
Vital diagram!

21. So to understand the diagram
I have notes for you from these slides…

22. Monopoly Monopoly Profit MC AC
This is both the short run and long run equilibrium position for a monopoly
Monopoly
Given the barriers to entry, the monopolist will be able to exploit abnormal profits in the long run as entry to the market is restricted.
Costs / Revenue MC
£7.00
Monopoly
Profit AC
AR (D) curve for a monopolist likely to be relatively price inelastic. Output assumed to be at profit maximising output (note caution here – not all monopolists may aim for profit maximisation!)
£3.00 AR MR
Output / Sales Q1

23. Welfare implications of monopolies
A look back at the diagram for perfect competition will reveal that in equilibrium, price will be equal to the MC of production.
We can look therefore at a comparison of the differences between price and output in a competitive situation compared to a monopoly.
Welfare implications of monopolies
Costs / Revenue MC
The price in a competitive market would be £3 with output levels at Q1. £7 AC
Loss of consumer surplus
The monopoly price would be £7 per unit with output levels lower at Q2.
On the face of it, consumers face higher prices and less choice in monopoly conditions compared to more competitive environments. £3 AR
The higher price and lower output means that consumer surplus is reduced, indicated by the shaded area. Q2 Q1 MR
Output / Sales

24. Monopoly Welfare implications of monopolies MC AC
Costs / Revenue MC
The monopolist will be affected by a loss of producer surplus shown by the grey triangle but…….. £7 AC
Gain in producer surplus £3
The monopolist will benefit from additional producer surplus equal to the shaded rectangle. AR MR
Output / Sales Q2 Q1

25. Welfare implications of monopolies
Costs / Revenue
The value of the shaded triangle represents the total welfare loss to society – sometimes referred to as the ‘deadweight welfare loss’. MC £7 AC £3 AR MR
Output / Sales Q2 Q1

26. Split into 2 groups Using your whiteboard to note your answers…
Your go….
Split into 2 groups
Using your whiteboard to note your answers…

27. Is it easy to criticise a monopoly?
So go on then
Brainstorm the key problems of having monopolies!
Why do most governments intervene to disband monopolies?
So do something more challenging
Brainstorm the key benefits of having monopolies!
Why do some governments allow monopolies to exist?

28. Problems of monopolies
Excessive prices (above market equilibrium)
Supernormal profits
Easy life… no incentive to be innovative – sole supplier – allocative inefficient
Can delay innovation through barriers of entry
Loss in consumer surplus and a gain in producer surplus (profits)
Dead weight loss…..
Product is under consumed.

29. The Case Against Monopoly - inefficiencies
There may be little pressure for a firm with monopoly power to maximise their efficiency or minimise costs of production
(i) “Managerial slack” or “X-inefficiencies”
(ii) Limited incentives to adopt cost-reducing innovations
(iii) (John Hicks) “The best of all monopoly profits is a quiet life”
The result may be a higher level of costs per unit (external diseconomies of scale)

30. Benefits of a monopoly EoS – lower costs from size of business
Innovation from retained profit – have little threat of competition so will invest profits into LT R&D
New technology or product development – many monopolies are ‘patents’ protected…..
Fewer wastes of ‘resources’ – most monopolies are ‘network’ based co that any competition requires duplication of resources.
To avoid govt investigation – may choose NOT to set excessive prices but pass on low LRAC (EoS) / abnormal profit as lower prices
Productively efficient (MR=MC)
Creates stability for consumers… monopolist knows its market well and can make LT plans with confidence

31. Monopoly Problems with models – a reminder:
Monopolies not always ‘bad’ – may be desirable in some cases but may need strong regulation
Monopolies do not have to be big – could exist locally

32. Homework
Revise diagrams from today’s lesson – for diagram test next lesson.
Use textbook (if they’ve arrived) to read up on Monopoly theory.
(or read photocopy pages!)

33. Next lesson
On Thursday – go upstairs to S6 for the ½ lesson – ICT research activity