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Economics

Study Notes

Monopoly - Key Terms

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

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


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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