Monopoly and Market Failure

1. Monopoly and Market Failure AS Economics

2. Aims and Objectives Aim: • Understand how monopolies cause market failure Objectives: • Recap on barriers to entry • Define a natural monopoly • Provide examples of different monopolies • Analyse the effects of a monopolistic market

3. Starter • Write down as many barriers to entry as you can for a monopolistic market. • Draw the diagram to show a monopolistic firm restricting output.

4. Natural Monopoly • A market in which there is only room for one firm benefitting to the full, from economies of scale. • Until recently utility companies were monopolies, until they were privatised in the 1980s.

5. Opening Up Royal Mail to Competition • Royal Mail Case Study

6. Geographical Monopoly • Single grocery store in a village or a single petrol station on a busy road. • Local market of the store is too small for another shop. • Oil company uses property rights to exclude rivals. • People can of course shop elsewhere and fill up elsewhere, however it is costly and inconvenient to do so, meaning the shop and station has a great deal of market power.

7. Government Created Monopolies • Coal, rail and steel were nationalised companies. Were privatised in 1970/80s. • Government believed that a state monopoly would allocate resources more efficiently than a private firms.

8. How Economies of Scale may Justify a Monopoly A monopoly benefitting from economies of scale Average Cost Average cost per unit of output C1 0 Q1 Quantity

9. Diagram Explained • Shows a natural monopoly where because of limited market size there is only room for one firm benefitting from economies of scale. • Economies of scale shown by downward sloping av cost curve. • A monopoly is able to produce output Q1 at an average cost of C1. • Whereas competitive firms are unable to produce at this output without destroying the competitive market.

10. Benefits of Monopolies • The conclusion that a competitive market produces a better allocation of resources than a monopoly depends on the assumption that no or few economies of scale exist in a competitive market. • When substantial economies of scale exist monopoly may lead to a better outcome than competition.

11. Further Benefit • If the monopoly’s products are protected by economies of scale or a patent, competitors cannot free ride on its’ success. • A monopoly can use their high profits to re-invest in R&D, producing new products.

12. Produce yourself a set of teaching notes and the monopoly diagrams • You are then to have an economist speed dating session. • You will have 3 minutes to tell your hot date all about monopoly in an attempt to ‘woo’ them with economics knowledge. • Your date will then score you out of ten.