Monopoly

Market characteristics

# of Sellers – one

Goods like – unique

Price setting power – complete

Consumer Choice – none

Entry & Exit to the market – high

Types of Monopoly

Pure Monopoly is a single supplier that dominates the entire market (100% control of the market).
CMA (UK Competition and Markets Authority) oversees the whole market to check that monopolies
do not control the market and exploit customers

Natural Monopoly is when the most efficient number of firms in the industry is one – utility
companies typically – needed for the functioning of society at the lowest cost – examples: Gas
network, Electricity grid, Railway infrastructure, National fibre-optic broadband network –
government subsidises the difference between LRMC and LRAC

Technological Monopoly is a monopoly that occurs when a single firm that controls the right to
technology required to produce a certain good/service (legal protection e.g. patents).

A working or technical monopoly is a firm is any firm with greater than 25% of the industries’ total
sales – legal monopoly

Regulators examples are Ofwat (Water) and Ofgem (Energy) – to investigate whether a firm is
exploiting consumers

A dominant firm is a firm that has at least a 40% market share.

Monopoly power depends on the scope and size of the market.

Often it is judged on a case-by-case basis. Global/National/Regional/Local, Industry by segment

Economic Case Against Monopolies

Prices are higher than under competitive conditions

Leads to a loss of allocative efficiency (Price > MC)

Regressive effects on lower-income households

Absence of genuine market competition may lead to production inefficiencies

X-Inefficiencies occurs when a firm lacks the incentive to control costs

Higher prices can limit the final output in a market and lead to fewer economies of scale being
exploited

Protected markets – perhaps less drive to innovate

Monopoly may to big – diseconomies of scale

Efficiency, Prices, Service (Exploitation), Welfare (Domination, anti-competitive practices and market
power)

Economic Case for a monopoly

High market concentration does not always signal absence of competition; can reflect the success of
firms in providing better quality products, more efficiently, than their rivals

Profits used to fund investment & research

Natural monopoly – economies of scale

Domestic monopoly faces global competition

Monopolistic firms can be regulated – i.e. industry regulator acting as a proxy consumer

Price discrimination may help some consumers

Interventions

Tax on monopoly profits e.g. windfall tax (One-Off Tax) – risk of tax avoidance/loss of capital
investment spending

Liberalization of markets – breaks up monopolies (allow smaller businesses to enter and encourage
contestability) – smaller businesses may struggle to scale up and compete

Introduce price capping policies – encourages cost efficiency + increases consumer surplus –
monopolists may find revenues in other ways

Nationalisation – take some monopoly utilities back into public ownership – possible loss of
productive efficiency