MONOPOLY 1

The Neo-Classical model of Monopoly
Assumptions: y y y y Profit maximisers Only one large producer in the market Substantial barriers to entry Asymmetric information may exist

Consequences: y y Profit maximised at MR = MC Because the monopoly supplies the whole market, the market demand curve is the monopoly s demand curve, and the market supply curve is the monopoly s supply curve. Hence the monopoly can choose either the prices or the level of demand for the product. Therefore, it is a price setter/maker. Barriers to entry may be natural or deliberate: o E.o.S. o Branding/advertising o Pricing o Fixed costs o Control over inputs/distribution

y

As a result of barriers to entry, SNP can persist in the LR. [Refer to page 19 in order to make sense of the following] Efficiency of a monopoly Allocative efficiency? No, because P > MC Productive efficiency? No, because AC > min Due to the lack of efficiency of a monopoly, it is often given quite a bit of bad press and perfect competition is often promoted. Structure Conduct Price takers Many buyers & sellers Pressured to adopt low cost methods No barriers to entry Price setters Single supplier No pressure to adopt low cost methods Significant barriers to entry Ability to extract producer Performance LR normal profits SR & LR allocative efficiency LR productive efficiency LR SNP

Perfect competition

Monopoly

No productive/allocative

surplus at the expense of the consumer However, the monopoly isn t really that bad y y

efficiency in the LR/SR

The monopoly only makes SNP if the cost and revenue structures allow it to. The monopoly will extract significant E.o.S. compared with a market with lots of small producers o It may not produce where AC = min, but it s AC may be significantly lower than the productively efficient PC firm  Due to this, price charged by a monopoly (whilst earning SNP) might still be lower than the allocatively efficient PC firm.

[refer to p23 to see diagram explaining and evaluating the monopolisation of a PC market] Pure monopoly is a situation where there is only 1 supplier of a product in that market, i.e. 100% market share. Pure monopolies do exist due to the presence of very high Minimum Efficient Scale (M.E.S.). That is to say, when we are dealing with a product where for e.g. infrastructure costs are very high that unless we have a single large supplier then AC would be too high for a profitable price/sufficient level of demand. For e.g. the utilities market (gas, electricity, water, land line telecommunication), here the high FC associated with infrastructure would make it inefficient to duplicate or triplicate the infrastructure by having more than one firm. If there are more than one firm, the AC for each would be extremely high to be able to charge a profitable price (since not enough market share would exist to be able to extract sufficient E.o.S.) For the purpose of government competition policy, market share > 25% is deemed sufficient to have a degree of monopoly power.