are three characteristics of monopoly:
- There is
only one firm in the industry, the monopolist.
- There are
substantial barriers to entry.
monopolist is a short run profit maximiser.
In reality the government and other agencies call firms who
have more than 25% of any particular market a monopoly.
Monopolies can be
e.g., royal mail
e.g., water companies
e.g., petrol station
The downward sloping demand curve for the industry must also
be the demand curve for the firm (as the monopolist is the only firm in the
industry). The gives the monopolist the power to be a price maker, he can set
the price and then sell whatever quantity consumers are willing to buy at
that price. Rather than setting
the price, he can set the quantity he wishes to sell and then accept the
price the market is willing to pay. Show this on the diagram below. It is because of this we say that the monopolist is
constrained by the demand curve.
This is very different to the situation that occurs when
there is competition in the market place (e.g., perfect competition and
monopolistic). When competition
exists the equilibrium quantity and price will be higher and lower
respectively; it can be argued that this is better for consumer welfare.
It is due to this reason that governments will intervene in the market
in order to prevent monopolies from existing.
The monopolist however is better off as it will be able to
earn abnormal profits due to the lack of any competitors in the markets.
The monopolist will more than likely produce at the lowest
possible cost for the level of demand. Breaking
up the monopoly will lead to an increase in average costs as output per firm
Monopoly and Allocative
monopolist will charge a price above the marginal cost as it will drive up
prices in order to earn abnormal profits.
and Dynamic Efficiency
can be argued that monopolists will be dynamically efficient as there is an
incentive to invest in research and development, as they will reap the future
profits. In perfect competition
firms will be unwilling to invest due to the presence of perfect knowledge;
any innovation will quickly become general knowledge to all firms in the
industry, thereby removing any future rewards.
Regulation of Monopoly
will use a number of policies in order to regulate monopolies.
could attempt to tax away abnormal profits, however this is unlikely to
improve efficiency. There would
be no incentive for firms to reduce prices or costs.
The tax may even discourage research and development due to the high
level of taxes of any future profits.
could be used to lower the equilibrium price and increase quantity, in an
attempt to achieve efficiency. This
is only likely to occur if the monopoly is loss making (e.g., railways) as
increasing a profit making companyís profits will be politically
regulating bodies have been set up in order to ensure that monopolists
donít exploit consumers, e.g.,
OFTEL (Office of
OFGEM (Combined Office Of Gas
& Electricity Regulation)
OFWAT (Office of Water
OFGAS (Office of Gas
maximum price increases in industries it will encourage monopolists to reduce
their costs in order to increase profits, thereby improving productive
efficiency. Monopolists argue
that they need to increase prices in order to be able to sustain dynamic
efficiency, e.g., water companies need to earn high profits so they can
invest in better water treatment plants etc..
Privatisation and Deregulation
Thatcher government embarked on a policy on privatisation through the 1980s,
when many previously state owned companies were sold to the private sector in
the hope improving efficiency, e.g.,
may or may not accompany deregulation. Deregulation
is the process of allowing competitors to enter markets that were previously
protected by legal barriers to entry. Competition
would hopefully drive down the price.
Breaking up the Monopolist
was done in an attempt to introduce competition into markets, however it more
than often simply led to regional monopolies, e.g., railways and water
on the internet
Monopoly PowerPoint Presentation
Produced by Drexel University
Monopoly Interactive Test
Produced by Oklahoma State University
(The Office of Fair Trading)
(The Department of Trade and Industry)
(Office of Telecommunications)
OFGEM (COMBINED OFFICE OF GAS & ELECTRICITY
For further information on electricity and gas regulation
OFWAT (Office of Water Regulation)
OFGAS (Office of Gas Regulation)
ORR (Office of the Rail Regulator)
Aviation Authority visit:
Policy section of the European Commission
Federal Trade Commission
United States Department of Justice
United States Department of Justice (Anti-Trust