Study Notes
Monopoly Power in Markets
- Level:
- A-Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 22 Nov 2021
What is a monopolistic market? This study note covers the essential of monopoly as a market structure.
Students should be able to:
- Understand the characteristics of this model and be able to use them to explain the behaviour of firms in this market structure
- Explain and evaluate the differences in efficiency between perfect competition and monopoly
- Explain and evaluate the potential costs and benefits of monopoly to both firms and consumers
What is a monopolistic market?
A monopoly in its purest form is when one single business dominates the whole market – it has 100% concentration.
The UK Competition and Markets Authority (CMA) describes a working monopoly as any firm with more than 25% of industry sales.
What is a dominant firm?
A dominant firm is one which accounts for a significant share of a given market and has a significantly larger market share than its next largest rival.
Dominant firms are typically considered to have market shares of 40 per cent or more.
What is near pure monopoly?
A near pure monopoly occurs when one firm has a market share in excess of 90 percent.
But more realistically, a near pure monopoly can exist when one seller has more than three quarters of a market defined in a certain way.
Monopoly power enjoyed by a firm depends in part on how the market is defined. Many businesses have local monopoly power, whereas others have market power at a regional or national level.
What are the key characteristics of a monopolistic market?
- Firms have market power / price-setting power (AR & MR slope down)
- Barriers to entry are high – costly to enter / long run profits maintained
- Economies of scale available to larger producers (“scaled advantage”)
- Consumers may face a limited choice of supplier and pay higher prices
- Few close substitutes reduces the cross-price elasticity of demand (XED)
How do we show monopoly price and output using a cost & revenue diagram?
Monopoly can choose price or output but cannot choose both
They are constrained by their demand curve (AR)
![](https://tutor2u-net.imgix.net/subjects/economics/monopoly_profit_max_21.png?auto=compress%2Cformat&fit=clip&q=80&w=800)
What happens to monopoly profit if there is an increase in demand? (Ceteris paribus)
![](https://tutor2u-net.imgix.net/subjects/economics/monopoly_rising_AR.png?auto=compress%2Cformat&fit=clip&q=80&w=800)
How can a monopolist protect their supernormal profits in the long run?
A monopolist can protect their market power and profits through barriers to entry
- Economies of scale - giving them a cost advantage over new rivals / challengers
- Vertical integration
- Brand loyalty
- Control of important platforms
- Patent protection
Some barriers are natural or intrinsic to an industry, others are strategic behaviours
Are there any important constraints on the market power of a monopolist?
- Industry regulator can investigate alleged anti-competitive behaviour
- Regulator may also impose a price-capping regime on a monopoly
- Extent of international competition can limit domestic market power
- Monopoly can still be contestable with emerging “disruptive” rivals
- Changing states of technology can threaten market power
- Ultimately demand / price elasticity of demand constrains a monopoly
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