Study Notes
Monopoly - Key Terms
- Level:
- A Level
- Board:
- AQA, Edexcel, OCR, IB
Last updated 22 Mar 2021
This study note contains a selection of key terms covering aspects of monopoly power in markets
| Abnormal profit | Profit in excess of normal profit - also known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run because of barriers to entry |
| Agency problem | Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm |
| Allocative efficiency | Producing goods and services demanded by consumers at a price that reflect the marginal cost of supply |
| Anti-competitive behaviour | Strategies designed to limit the degree of competition inside a market and reinforce the monopoly power of established businesses |
| Barriers to entry | Ways to prevent the profitable entry of new competitors – they may relate to differences in costs between existing and new firms. Or the result of strategic behaviour by firms including expensive marketing and advertising spending |
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| Bi-lateral monopoly | Where a monopsony buyer faces a monopsony seller in a market |
| Brand extension | Adding a new product to an existing branded group of products |
| Brand loyalty | The degree to which people regularly buy a particular brand and refuse to or are reluctant to change to other brands |
| Complex monopoly | A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market |
| Concentration ratio | Measures the proportion of an industry's output or employment accounted for by the largest firms. When the concentration ratio is high, an industry has moved towards a monopoly, duopoly or oligopoly. Share can be by sales, employment or any other relevant indicator. |
| Franchised monopoly | When the government grants a company the exclusive right to sell or manufacture a product or service in a particular area |
| Monopoly profit | A firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors |
| Monopsony | When a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without that buyer there would not sufficient demand for the product to survive |
| Natural monopoly | For a natural monopoly the long-run average cost curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available |
| Price discrimination | When a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs |
| Supernormal profit | A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost |
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