Monopoly

Supernormal profits
-Less incentive to be efficient/innovative/produce new products -More resources to protect market dominance by raising barriers to entry +More funds for investment and R&D +Reserves to overcome short term difficulties (eg: stability to employment)

Monopoly Power
-Higher prices, lower output for domestic consumers +Financial muscle to compete effectively against multinational firms

Productive Efficiency
-Productively inefficient(MC AC) +Economies of scale: AC likely lower than most efficient perfectly competitive firms (MC=AC)

AllocativeEfficiency
-Misallocation of resources (P MC) (Less choice/Lower quality) +Avoid unnecessary duplication of capital (eg: airport runway / railway track / electricity/water distribution network)

Cross-subsidisation
-Wastes resources as profits from one sector is used to finance losses in another +Increased range of goods (eg: provision of essential loss-making services: rural bus/mail services)

Price Discrimination
-Raise producer surplus, reduce consumer surplus/welfare +Raise firm s total revenue(TR) to allow survival of essential services

Barriers to Entry/Contestability
-Complacent monopoly raises entry barriers by limit/predatory pricing +Supernormal profit acts as incentive for rival firms to breakdown monopolies through creative destruction by investing in R&D and innovations

just responding to increases in production costs -technological change (internet) undermines price/output agreements -Tacit collusion: .lower consumer surplus. Type Price fixing.hard to prove -long investigation means collusion still goes on -opportunity cost of investigation: funds/time -Welfare loss depends on magnitude of price fixing Pro +Share R&D costs=wider range of products. prices . quality. choice=welfare loss .Collusion Def: Firms agree to restrict competition between themselves by fixing prices and restricting output to secure joint profit maximisation. restrict output (allocating market share) Limit advertising budget Share market/technical info Tacit collusion Firms have an understanding on pricing and output decisions often through price leadership (eg: Other firms follow pricing decisions of market leader) Conditions Oligopolistic market structure (so few major firms to reach an agreement) Effective monitoring system to prevent cheating No potential competition (eg: hit-and-run) /no effective competition Similar cost structure for similar pricing decisions Stable. higher quality. mature industries (eg: steel) Indication/signs Same prices Raise prices by same amount at the same time High supernormal profits High share prices Evaluation Collusion unlikely: -Competition Commission: -Fines up to 10% of annual revenue/ Imprisonment for directors -Whistle blowers protected by competition law .Evaluate Conditions: -Cartels tend to breakdown due to cheating -Independent firms (competition) gain market share at expense of cartel members -Similar cost structures: firms are innocent. more choice +Less wastage on advertising +Share technical info=improve safety of products/ safety of workers Cons -higher producer surplus.

Non-price strategies 1. Asymmetric information: Insufficient market info/ No expertise in management 5.Rationalisation Cut costs:-wage cuts -staff cuts -reduce pension benefits Increase efficiency: -combine head offices -rationalise supply chain .Back to basics: -concentrate on core activities to compete more effectively 4.Advertising: Increase/ decrease advertising 6.Diversify: 5.invest in new technology (increase productivity to lower unit costs) 2. Rationalisation: -Less staff=worse consumer experience -Wage cuts=lower productivity -Rationalise supply chain=less products=less choice -Benefits of technology takes time (retraining of staff/installation) 2. Sale: -Reduced market share -Short-term solution since reduced scope for economies of scale 3.Try to End price war Evaluation(Turn answer on its tail) 1. Advertising: Increase=expensive/may be unsuccessful : Decrease=Weaker brand/lower market share 6.Difficult to end price war .Close down/sale of unprofitable stores/services 3. Too dependent on one market 4.

Niche market: specialist with small market size 2. Falling demand in markets Evaluation(Turn answer on its tail) Diseconomies of scale (x-inefficiency/ rising raw materials& labour costs) Natural monopoly: +Avoid duplication of capital. 4. Economies of scale: Purchasing: Bulk buying Marketing: Advertising costs shared Financial: Lower borrowing costs Managerial: Share head office Technical: Increased dimensions. Natural monopoly No single firm able to fully exploit benefits of economies of scale due to high fixed costs High (Minimum Efficient Scale): Large scale production needed to obtain economies of scale 3. Contestable 1. 3. Technological change (creative destruction) erode advantage of large firm . Competition Commission: -restrict mergers ensures contestability 1. Falling demand: .temporary/ long term trend? 7. planning permission.Legal barriers=significant . R&D costs Risk-bearing: Spread risks over wide range of products 2.Contestability -Low entry & exit barriers -Low sunk costs -Existence of Potential competition (eg: hit-and-run) Not Contestable(Indication: High concentration ratio/closure. High Start-up costs: 4. lower profits) 1. indivisibilities. patents =some industries dependent on government subsidies -Overt=Limit/Predatory pricing by existing firms leading to price war -Brand Loyalty: Consumer Inertia -AsymmetricInfo: Hard to secure supplies of raw materials/skilled labour/lack of expertise 6.foreign firms eager to gain foothold in market . 2.Consumers are fickle 6. Small firms provide may more choice/ higher quality ? 3. lower prices Start-Up costs: Large firms have large funds Sunk costs:-Sale of brand to recoup costs -Good second-hand market -Not labour intensive=less redundancy payments 5. Magnitude of barriers: . High Sunk costs:-Advertising -Losses from resale of machinery/capital -Redundancy -Fines from contractual obligations (if contract broken) 5. Barriers: -Legal=government license/contract.

Asymmetric information= Lack of expertise-low efficiency-losses 3. Increase profits: merge profit margin from each stage of production Cross-subsidising with supernormal profits 6. indivisibilities. Opportunity cost of merger: Large funds needed/ merger may fail 6. Economies of scale: Purchasing: Bulk buying Marketing: Advertising costs shared Financial: Lower borrowing costs Managerial: Share head office Technical: Increased dimensions.Secure supplies (control quality of raw materials/delivery deadlines) Evaluation(Turn answer on its tail) 1.Mergers & Integrations Advantages of Vertical Integration 1. + Gain market share quickly (increase monopoly power) +Enter new markets-Higher growth-Secure long term survival 3. Brand dilution: Unsuccessful part of business affect whole brand image 5. of Scale 2. Creates stronger brand 5. -Diseconomies of scale (x-inefficiency/ rising raw materials & labour costs/ geographical spread -Economies of scale benefits take time/ limited scope for further gains from Econ.Gainexpertise/technical info Forward: -Establish distribution network: -Secure market outlets -Direct contact with customers: . Lead to Job Losses Horizontal Evaluation 1. Investigation by Competition Commission 4.Gain market info Backward: . +Reduce competition by eliminating competitor & protect against takeover + Barriers to entry 4. R&D costs Risk-bearing: Spread risks over wide range of products 2. Overdependence on one market: Danger of declining market Diversify? .

dividends. credit rating. Asymmetric information: -difficult to predict appropriate level of profits/output 7. Firms have incentive to cut costs&increase efficiency to maintain previous profits 4. Harsh Price Caps: Fall in share prices. Loose Price Caps: Higher supernormal profit used inappropriately for -Higher dividends -Higher director salary/staff wages 3. Danger of takeover by foreign firms 2. Regulatory Capture: 6. steady revenue) +Better idea of efficiency improvements needed +Easier to plan investments -Technological change/external shocks=difficult to predict appropriate level of profits. control power of natural monopolies -Fall in profits & revenue=Less investment=Lower quality=Welfare loss Loose Price Caps +Higher profits & revenue=More funds for investment=Welfare gain -Tougher price cap next time Evaluation(Turn answer on its tail) 1. Regulation only second best solution as surrogate to competition .Price Caps Def: Price limitimposed by regulator on firm to prevent abuse of monopoly power Lasts for 5 years RPI+K% Firm is allowed to increase prices k% above rate of inflation RPI-X% Firm is allowed to increase prices X% below rate of inflation Predictability/Unpredictability +More accurate revenue estimation (price cap =stable. Regulator has discretionary power to set up price caps =unfair for some firms 5. output & funds for investment Harsh Price Caps +Protect consumer interest. higher financial costs.

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