Monopolies Content What a monopoly is Advantages of

Monopolies

Content • • What a monopoly is Advantages of monopolies Disadvantages of monopolies Monopolies and resource allocation

What a monopoly is • Monopoly – this is where there is a single producer in the market • Features: – One producer is able to charge relatively high prices – New products are rarely introduced – Resources are not used efficiently – Monopolies have market power – Monopolies are able to set prices

Features of Monopolies • Monopolies are price setters –they are able to set the price for the whole market • Some markets are considered to have “natural monopolies” in this case having one producer is seen as the ideal • If a natural monopoly occurs then to ensure resource allocation is efficient they need to be monitored by a regulatory body or watchdog e. g. OFTEL and British Telecom

Advantages of Monopolies • As monopolies often operate on an immense scale they can exploit economies of scale • Economies of scale occur when output increases and unit costs decrease • These cost reductions will lead to a decrease in costs and increase in profits for the monopoly producer • However some of the gains in productive efficiency may be transferred to the consumer in the forms of profits

Advantages of Monopolies • Government regulation of monopolies means annual price increases can be controlled • Some of the monopolies profits may be used to invest in research and development • This expenditure on innovation and invention could lead to efficiency gains in the market

Advantages of Monopoly • If a firm is operating as a domestic monopoly but is open to international competition their market power will be limited and they will therefore have to charge lower prices

Disadvantages of Monopolies • It is argued that monopolies producer at a lower output with higher prices than a producer in a competitive market would • This leads to a reduction in the consumer surplus and an increase in producer surplus • Supernormal profits are earned by the monopoly at the expensive of allocative efficiency

Disadvantages of Monopolies • The lack of any competition in the market can increase inefficiency as customers are stripped of the ability to choose • Dynamic efficiency may be lost if monopolist limits consumer choice and innovates less

Monopolies and Resource Allocation • Monopolies are viewed as a form of market failure as they do not allocate resources as efficiently as in perfect competition • As the consumer surplus is reduced this is seen as inefficiency and an example of where the market has failed to allocate resources in the optimum way

Summary • A monopoly is where there is one producer who dominates the market • In a monopoly the monopolist sets prices as they have market power • Monopolists can benefit from economies of scale which may be passed onto consumers in the form of lower prices • Monopolists may conduct more research and development • Monopolies produce less at higher prices reducing the consumer surplus • Economists view monopolies as market failure • Monopolies don’t allocate resources in the most effective way