Monopoly

1. Monopoly Click on the arrow to move to next slide

2. Monopoly • Monopoly is a market structure where there is one firm who has control over the market for a product or service by being the sole supplier. • Think of the board game ‘Monopoly’. The aim of the game is to buy (or take over) as much of the property on the board as possible and therefore to end up as the sole supplier.

3. Conditions of Monopoly

4. 1. Sole producer (supplier) of the good or service • A monopoly will be the sole supplier of a good or service and therefore will produce 100% of the industry’s output. • As a result, a monopoly has considerable power over the price set for the good. • It is a price maker. • A monopoly will also control the level of output of a good.

5. 2. The good has no close substitutes • A monopoly will produce a good which has no close substitutes. • This gives the firm power over its customers because if they wish to purchase the good, they have no alternative but to purchase from the monopoly or do without.

6. 3. Barriers to entry • In order to protect its monopoly position, there are barriers to entering the market which a monopoly will use to prevent competition.

7. a. Statutory monopolies • There are monopolies which are protected by law. The Post Office in the UK is a statutory monopoly protected by Government legislation.

8. b. Patent rights/high set-up costs • Firms which have high set-up costs or high research and development costs will want to remain the sole producer of a good. • For example, a drug company may have spent large amounts of capital on researching and developing a new drug. The firm will want to patent the drug in order to prevent other companies from copying it and making profit from selling it.

9. c. Agreements between producers (cartels) • Producers can form a cartel, which is a group of producers who have grouped together in order to restrict competition in the market. • The Organisation of Petroleum Exporting Countries (OPEC) and the DeBeers diamond cartel are two of the most famous cartels in the world. • http://www.opec.org/home/ • http://www.debeersgroup.com/debeersweb

10. d. Tariffs and quotas • A tariff is a tax placed on a foreign good by the government of the country that the good is destined for export to. • A quota, unlike a tariff, is a restrictive amount of foreign goods being permitted entry into a country.

11. Monopoly price and output behaviour MC AC P R C S AR MR

12. Monopoly price and output behaviour • The monopolist is a short-run profit maximiser, operating at a profit-maximising level of output where MC = MR. • The high price charged by the monopolist will result in supernormal profit being earned. This is shown on the diagram as the area PRSC.

13. Regulation of monopoly • A monopoly will be regulated by the government or by government agencies to ensure that monopoly power does not lead to anti-competitive practices or to consumer exploitation, such as high prices.

14. The Competition Commission • The Competition Commission was set up by the Competition Act 1998. It is a public body and was previously known as The Monopolies and Mergers Commission. • Click here to access www.competition-commission.org.uk

15. The Competition Commission fulfils the following roles: a.Reporting on referrals made by the Director General of Fair Trading, the Department of Trade and Industry and the main utility regulators. b. Hearing appeals against prohibitions under the Competition Act 1998.

16. European Competition Law • Articles 81 and 82 of the Treaty of Rome prohibit certain market practices which are considered to be anti-competitive and which are against the interests of consumers. a. Article 81 prohibits acts which damage competitiveness in a market. b. Article 82 prohibits the abuse of a dominant position. End of Presentation