MONOPOLY MARKETS
Monopoly: a market where one firm dominates the market, or has some influence over the market price (price maker), or has at least 25% of the market (legal definition)
Examples include
Post Office: monopoly over the delivery of letters up to £1.00
Tesco: price maker in the supermarket industry
Procter and Gamble: over 25% of the washing powder industry
Monoploy power arises from the ability to deter competition from entering the market, ie barriers to entry exist. Examples include:
Legal protection: patents and laws preventing competition in industries,
eg Post Office
Resource barriers: sole control over materials and outlets prevents others firms
gaining access
Marketing barriers: brand loyalty and product differentiation
Lower costs: economies of scale generated through purchasing, financial,
technical and managerial economies
Anti competitive practices: pricing policies which make it difficult for new
firms to come into the market
Natural monopoly: industries with large start up costs, suggesting that one firm should dominate the market so that full economies of scale can be achieved which can create lower prices for consumers
Monopolistic behaviour can lead to an inefficient allocation of resources because of a lack of competitive pressures:
higher prices than under competitive pressures (allocative
inefficiency)
reduced choice for consumers
reduced quality
higher costs (productive inefficiency)
x inefficiency due to lack of competitive pressures
less pressure to innovate due to lack of competition
generation of abnormal profits which transfer excessive amounts of income
from consumer to producers
Monopolies also can lead to an improvement in economic welfare:
economies of scale which generate lower costs (productive
efficiency)
lower costs which lead to lower prices improving allocative efficiency
dynamic efficiency gains through R&D spending as firms attempt to bring new
products to the market
increased stability in response to general economic instability