Monopoly

• Pure monopoly-- industry is the firm
• Actual monopoly-- where firm has >25% market share
• Natural Monopoly-- high fixed costs-- gas, electricity, water, telecommunications, rail
– High barriers to entry
– Firm controls price or output/supply
– Abnormal profits in long run
– Possibility of price discrimination
– Consumer choice limited
– Prices in excess of MC

Advantages and disadvantages of monopoly:
• Advantages:
– May be appropriate if natural monopoly
– Encourages R&D
– Encourages Innovation
– Development of some products not likely without some guarantee of monopoly in production
– Economies of Scale can be
• Disadvantages:
– Exploitation of consumer-- higher prices
– Potential for supply to be limited-- less choice
– Potential for inefficiency:
X-inefficiency--

Imperfect or Monopolistic Competition

–Many buyers and sellers
– Products differentiated
– Relatively free entry and exit
– Each firm may have a tiny ‘monopoly’ because of the differentiation in their product
– Firm has some control over price
– Examples: Restaurants, professions-- solicitors etc., building firms-- plasterers, plumbers etc.

Oligopoly-- Competition amongst the few
– Industry dominated by small number of large firms
– Many firms may make up the industry
– High barriers to entry
– Products could be highly differentiated-- branding or homogenous
– Non-price competition
– Price stability within the market-- kinked demand curve?
– Potential for collusion?
– Abnormal profits
– High degree of interdependence between firms

Examples of Oligopolistic Structures:
– Supermarkets
–Banking Industry
–Chemicals
– Oil
–Medicinal drugs
– Broadcasting

Market Structure and Competition

Market Structures
• Type of market structure influences how a firm behaves:
–Pricing
–Supply
–Barriers to Entry
–Efficiency
–Competition

Degree of competition in the industry
• High levels of competition-- Perfect Competition
• Limited Competition-- Monopoly
• Degrees of competition in between

Determinants of market structure
– Freedom of entry and exit
–Nature of the product-- homogenous (identical), differentiated?
–Control over supply/output
–Control over price
–Barriers to entry

Perfect Competition:
– Free entry and exit to industry
– Homogenous product-- identical, so no consumer preference
– Large number of buyers and sellers-- no individual seller can influence price
– Sellers are price takers-- have to accept the market price
– Perfect information available to buyers and sellers

Examples of perfect competition:
–Financial markets-- stock exchange, currency markets, bond markets?
–Agriculture?
• To what extent?