Pure Monopoly and Monopoly Power
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Last updated 30 Oct 2019
This revision video looks at the distinction between a pure monopoly and a firm that has monopoly (market) power.
What is a pure monopoly?
- A pure monopoly is a single supplier within a defined market or industry
- The firm effectively is the industry in this situation
- The nature of the market is that no close competitor or substitute exists
- A near pure monopoly occurs when one firm has a market share in excess of 90 percent
What are the key characteristics of pure monopoly?
- Significant internal economies of scale – the minimum efficient scale may be so high that only one supplier can fully exploit available economies of scale (i.e. a natural monopoly)
- High regulatory barriers to entry e.g. licences required to operate, awarded franchises can give local/regional market power. Some state-owned firms have monopoly status.
- High trade barriers which give increased monopoly power to a domestic firm protected by import tariffs
- A firm might have localised monopoly power with no close substitute available
What stops an industry becoming a pure monopoly?
A pure monopoly might have their legal monopoly taken away e.g. the Royal Mail lost their monopoly in parcels and letters delivery
Competition authorities might find other ways to inject competition e.g. access operators in the UK rail industry
Technological change creates new substitute products and competitors and helps to bring entry barriers down
Most industries are contestable to a degree – there is always the threat of potential rivals
What are the key features of a business having monopoly power in one or more markets?
- Price setting power including the option of using price discrimination
- Ability to harness barriers to entry to maintain supernormal profits in the long run
- Market power depends on the structural characteristics of the industry
- Even firms with a lot of market power might need to consider the threat of potential rivals
The ability of a firm to influence or control the terms and condition on which goods are bought and sold. A profit-maximising firm with market power is most likely to use that market power to charge higher prices than if an industry was more competitive. The extent of monopoly power depends crucially on how we define the market.