Chapter 20 - Monopoly

EC2 ECONOMICS

DOMINANT TOTAL
SELLER CONTROL
 MOST COMPETITIVE LEAST COMPETITIVE

Market
Competitive Market Oligopoly Monopoly
Structure
(Chapter 18) (Chapter 21) (Chapter 20)
 Learning Ojectives
• Understand how to define monopoly
• Understand the main features of a monopoly
• Understand the advantages and disadvantage of
monopoly
 Vocabulary
Word Definition

Monopoly Situation where there is one dominant seller in a market

New Company that starts to sell goods or services in a market where they
entrant have not sold them before, or one of these goods or services
Price Where a dominant business is able to set the price charged in the
maker whole market
Licence that grants permission to operate as a sole producer of a
Patent
newly designed product
Situation that occurs when one firm in an industry can serve the
Natural
entire market at a lower cost than would be possible if the industry
monopolies
were composed of many smaller firms
Market Groups of customers that share similar characteristics, such as age,
segments income, interests, and social class
Types of Monopolies
 Types of Monopolies
1. Pure Monopoly (not common)
• Single seller (Monopolist)
• It's more efficient for one company to sell/produce
• Example: Water and rail industries in some countries, SBB in
Zurich

2. Legal Monopoly
• Large percent of the market (=> 25%)

3. Local Monopoly
• One firm supports a village or local market
FEATURES OF A MONOPOLY?
 Features of Monopolies (4)
1. One business dominates the market
a. In India – there is one seller of rail travel

2. Unique product (nothing similar around)

a. Product highly differentiated
b. None around exactly like it

3. Price-Maker
a. Force prices up by restricting quantity supplied
b. Can’t fix both price and quantity
c. Sell large quantities the price will be forced down
 Features of Monopolies (4)
4. Barriers to entry (5) (prevents new entrants from trying)
1. Legal barriers
• new entrants are legally forbidden from entering the market
• ex., FIFA World Cup broadcasting rights (Revenue: $2.6 Billion in 2018)
• https://en.wikipedia.org/wiki/2018_FIFA_World_Cup_broadcasting_rights

2. Patents (type of legal barrier)

• Allows a company to charge a higher price as it is the only one on the market
• ex., new drugs – pharma
3. Marketing budgets
• Strong brand names have large marketing budgets to defend them
• New entrants are unfamiliar, not be trusted against the strong name
• Can lower prices temporarily to deter new entrants (predatory pricing)
• ex., Streaming Wars - Netflix spent $2.6 Billion in marketing/$15 Billion in New Content (2019)
• https://www.thedrum.com/news/2020/01/21/netflix-facing-muted-international-competition-ups-marketing-spend-325m
• https://observer.com/2019/10/netflix-disney-apple-amazon-hbo-max-peacock-content-budgets/

4. Technology
• Access to up-to-date technology
• ex., developed new machine that beats rivals machines (Google's algorithm)
5. High start-up costs
• Cost of setting up a firm is too high
• ex., Rolls-Royce is the only jet engine producer in the UK and spends 800M pounds a year on R&D alone
GOOGLE CASE STUDY: PAGE 148
 Discussion: Is Google A Monopoly?

What is a Monopoly? Does This Apply to Google? Yes/No

One business dominates the market 92% of the search engine (worldwide) Yes
MONOPOLY – ADVANTAGES & DISADVANTAGES
Advantages & Disadvantages of Monopolies
Business (B)
Advantages Disadvantages
• Efficiency • Lack of Innovation
• avoids duplication = less waste • there is little incentive to innovate when
there is no competition
• Innovation
• make large profits so can work on • Inefficiency
product development that will benefit • Too big suffer from Diseconomies of Scale
consumers • Offer poor customer service
• Waste money if they have a care-free
• Economies of Scale business approach
• keeps costs low per unit (average costs)

• Strength against the Government

Advantages & Disadvantages of Monopolies
Consumer (I)
(+)
• economies of scale (lower costs) can
benefit consumer if the savings are passed
on through lower prices
• innovation can create useful new products
(-)
• do not have perfect information as there is
no market price
• consumers may experience poor service
and have no other options
• reduced choice
• higher prices if Monopoly restricts supply
Government (G)
(+)
• the monopoly provides employment,
which helps to lower the unemployment
rate
• efficiency means there is less waste in
society
(-)
• the monopoly may become more
powerful than the authorities can
regulate
• there is an opportunity cost to the
government related to the time it spends
regulating monopolies
GOOGLE CASE STUDY: PAGE 148
 Google Case Study
Advantages Disadvantages
• Innovative – has come up with • Privacy – its users’ activities are
many new products like being tracked; individual privacy
GoogleMaps, etc. rights

• Efficient – tool became a • Tax avoidance - the average citizen

monopoly because it is useful and without so much power has to pay
works well much more in taxes

• Economies of scale related to R&D • Too powerful for authorities to

challenge any bad behavior; can do
illegal things potentially without legal
• Google provides many jobs where ramifications (can use our data)
it is located
UK WATER CASE STUDY: PAGE 151
 UK WATER CASE STUDY: PAGE 151
1. What is meant by a natural 1. More efficient if just one firm supplies all consumers because of
economies of scale - very high fixed costs such as the utilities and
monopoly? rail travel. It would be highly inefficient if two or more railway
operators tried to supply rail travel between the same
destinations using their own railway lines.

2. Describe one more possible 2. Since most monopolists are large, they are able to exploit economies
of scale. This means that their average costs are lower. As a result,
advantage of a monopoly. they may be able to supply products to consumers at a lower price.

3. Why is there an industry 3. Protect consumer from being exploited. Water is a necessity.
regulator in the provision of
water in this case?

4. Who is likely to benefit from the 3. The owners of the water company.
mistake made by Ofwat?
AIR NAMIBIA CASE STUDY: PAGE 152-153
 AIR NAMIBIA CASE STUDY
1. Do you think that Air Namibia is
a pure monopolist. Explain
your answer.
2. Describe two features of
monopoly. Give two examples
from this case to support your
answer.
3. How are consumers being
exploited in this case?
1. Air Namibia is clearly a pure monopolist in this example. Air
Namibia is the only airline providing domestic air travel in
Namibia. Air Namibia does not face any competition at all in
this market.
2. One feature of monopoly is that the firm is a price maker. In this case,
Air Namibia is the only domestic carrier and is free to set the prices of its
air tickets without any impact on rivals. In this case, passengers already
spend around N$5000 for a return ticket to Windhoek. This domestic
flight was more expensive than going to Cape Town.
Monopolies often exist because competition is prevented. In some
markets, there are obstacles that prevent new entrants from trying to
compete. Barriers to entry are a common feature in monopoly. In this
case, Air Namibia has been accused of blocking competition in the
market.
3. High prices and poor quality.
PFIZER AND FLYNN CASE STUDY: PAGE 154
PFIZER AND FLYNN PHARMA - ADVANTAGES

Advantages Example(s)
1. Innovative 1. 48,000 patients rely on the drug in the
UK (anti-epilepsy drug)
2. Economies of Scale 2. Pfizer’s Research and Development

***patents are used to give the inventor of a new product a period

of exclusive use in order to recoup their R&D spending and make
a profit from their invention***
PFIZER AND FLYNN PHARMA -
DISADVANTAGES
Disadvantages Example(s)
1. Higher Prices 1. increased the drug prices by 2,600%
after deal with NHS (regulators) ended
-expenditures on the drug went from £2
million in 2012 to £50 million in 2013
DIAGRAM OF A MONOPOLY