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Monopoly

 

Three characteristics of monopoly

        There is only one firm in the industry, the monopolist.

        There are substantial barriers to entry.

        The 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 national (royal mail), regional (water companies) or local (petrol station).

 

Revenue curves

The downward sloping demand curve for the industry must also be the demand curve for the firm. This 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.

 

Ideally the monopolist would like to be able to sell a large quantity at a high price, however it can only set one or the other.  It is because of this we say that the monopolist is constrained by the demand curve, as shown overleaf.

 

The demand curve is relatively inelastic as there are no substitutes available.

 

 

Short run equilibrium

There are three possible outcomes, abnormal profits, normal profits and losses.

        Abnormal profits (AR>AC)

 

        Normal profits (AR=AC)

 

        Losses (AR less than AC).

 

Long run equilibrium

If losses persist in the long run the monopolist will leave the market (unless it receives a subsidy or it has an objective other than making a profit).

 

If abnormal or normal profits are being earned, the monopolist will remain in the market in the long run. Unlike perfect competition, it is possible to earn abnormal profits in the long run due to the presence of barriers to entry, which prevent firms entering the industry and eroding the profits.

 

Notes on the internet
Monopoly PowerPoint Presentation
Monopoly
Produced by Drexel University
Monopoly Interactive Test
Produced by Oklahoma State University
Monopoly Worksheets
Competition Commission
OFT (The Office of Fair Trading)
F DTI (The Department of Trade and Industry)
OFTEL (Office of Telecommunications)
OFGEM (COMBINED OFFICE OF GAS & ELECTRICITY REGULATION)
For further information on electricity and gas regulation
OFWAT (Office of Water Regulation)
OFGAS (Office of Gas Regulation)
ORR (Office of the Rail Regulator)
Civil Aviation Authority visit:
Financial Services Authority
Independent Television Commission
Radio Authority
Competition Policy section of the European Commission
US Federal Trade Commission
United States Department of Justice
United States Department of Justice (Anti-Trust Division)

 

 

 

E-mail Steve Margetts