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Questions and Answers
What is the main argument of people on the political right regarding industry ownership?
Privatization is the transfer of ownership of private sector assets to the public sector.
False
What is the main objective of taxing monopoly profits?
To improve equity by returning some consumer surplus to taxpayers.
The goal of granting subsidies is to reduce the ____________________ of production.
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Match the following privatization strategies with their descriptions:
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What is a potential drawback of providing state subsidies to the private sector?
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Monopolies are always bad for the economy.
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What is the key concern for economic policy makers regarding monopolies?
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Governments must be ever-vigilant to impose the correct degree of ____________________ on monopolies.
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Regulation is seen as the answer to dealing with monopolies that are necessary evils.
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What is the primary goal of deregulation or liberalization?
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Monopolies are always better at producing new products.
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What is the potential drawback of taxing monopoly profits?
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The goal of granting subsidies is to reduce the ____________________ of production.
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Match the following privatization strategies with their descriptions:
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What is the key concern for economic policy makers regarding monopolies?
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Governments should not regulate monopolies at all.
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What is the potential drawback of providing state subsidies to the private sector?
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Too little control on monopolies and ____________________ will suffer.
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What is the main advantage of contracting-out?
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Study Notes
Defining Monopoly
- A monopoly is defined as the sole supplier of a good, able to prevent the entry of competitors, and for whose product there is no very close substitute.
- The word "monopoly" comes from the Greek words "monos polein" which mean "alone to sell".
- A monopoly does not necessarily imply that there is a single producer. The essence of a monopoly is that there is a single supplier.
Measures of Monopoly Power
- The most obvious measure of monopoly power is looking at the percentage of the market which any one firm accounts for.
- A firm with a market share reaching 40% will always be deemed to have the ability to act independently on the market share and so to be in a dominant position.
- Concentration ratios are often used to measure monopoly power to see what is the percentage of the industry's output accounted for by the four firms with the largest output in the industry.
- The range of the concentration ratio is from almost 0 for perfect competition to 100 for monopoly.
Monopoly Power based on Restriction of Entry
- Monopoly power depends on some restriction of entry into the particular market.
- Barriers to entry protect the monopolist from new firms.
- Types of barriers to entry:
- Legal Barriers: legal monopoly, patent, copyright, license, and franchise.
- Natural Barriers: natural monopoly, economies of scale, and economies of scope.
- Other barriers: ownership of a key resource, special factors, transport costs, secret process, artificial barriers, and reputation.
Price and Output Decisions under Monopoly
- The demand curve facing the monopolist is the market demand curve which is downward sloping.
- The average revenue curve coincides with the demand curve.
- The marginal revenue curve slopes downwards and lies below the average revenue curve.
- The monopolist would never expand into the inelastic region of the demand curve.
- The profit-maximising monopolist will always operate in the elastic region of the demand curve.
- The profit-maximising level of output for a monopolist is the one at which marginal revenue equals marginal cost.
- The monopolist faces a downward-sloping demand curve and its marginal revenue curve falls twice as much as fast as average revenue.### Monopoly and Perfect Competition
- Monopoly: a single firm produces the entire market output in a particular industry
- Perfect Competition: many firms produce a homogeneous product, and no single firm can influence the market price
Short-Run and Long-Run Analysis of Monopoly
- In the short run, a monopolist operates where MR = MC, and produces OQ* output, charging OP* price
- The monopolist suffers losses equal to area CABP* due to inability to cover total costs
- In the long run, a monopolist will exit if it cannot cover all costs; LRMC = MR, and P ≥ LRAC
Comparison of Perfect Competition and Monopoly
- Perfectly competitive industry produces where supply curve (MC curve) cuts the demand curve
- Monopolist produces where MC curve cuts the MR curve
- Under monopoly, price is higher, output is lower, and there is a loss of consumer surplus
- Deadweight loss occurs due to under-consumption of the product
Disadvantages of Monopoly
- Higher price, lower output, and deadweight loss
- Allocative inefficiency, as price is higher than marginal cost
- Lack of variety and choice for consumers
- Potential for abuse of power and discouragement of research
Advantages of Monopoly
- Exploiting economies of scale, leading to lower unit costs and prices
- Innovation and research may be encouraged due to assured profits
- Stability of employment, output, and price
- Ability to compete overseas and develop large firms
Price Discrimination
- Charging different prices to different consumers for the same product
- Requires:
- Imperfect market
- Separated markets or segments
- No "seepage" between markets
- Different elasticities of demand
- Can be beneficial in certain cases, such as spreading the load and providing services to those who cannot afford them
Public Policy towards Monopoly
- Regulation: government regulates the behavior of monopolists
- Increasing competition: removing barriers to entry, restructuring the market, and promoting competition policy
EU Competition Policy
-
Prohibits anti-competitive practices and abuse of dominant position
-
Regulates mergers and state subsidies to ensure fair competition### Types of Pricing Strategies
-
Profit-maximising pricing: set price where MR = MC
-
Average Cost Pricing: set price equal to average cost (P = AC)
-
Marginal Cost Pricing: set price equal to marginal cost (P = MC)
Price Capping
- Figure 9.9: illustrates how price capping works
- Imposed by regulators to prevent monopolies from charging high prices
Government Policies to Deal with Monopoly
- Regulation: to make markets operate more efficiently and champion consumer welfare
- Public Ownership: government runs natural monopolies, common in European countries
- Privatisation: transfer of ownership from state to private sector
- Taxation of monopoly profits: to improve equity and return consumer surplus to taxpayers
- Granting of subsidies: to reduce marginal cost of production and promote allocative efficiency
Privatisation
- Transfer of ownership of public sector assets to the private sector
- Deregulation or liberalization: removal of government regulation to promote competition
- Contracting-out, competitive tendering or franchising: private firms undertake services previously carried out in the public sector
- Marketisation or commercialization: increased market provision of services previously undertaken in the non-market sector
Conclusion
- Monopoly has a bad reputation, but some argue it's necessary for innovation and R&D
- Government must balance regulation to protect consumers and allow monopolies to operate efficiently
- International considerations and political factors affect regulation of monopolies
Defining Monopoly
- A monopoly is defined as the sole supplier of a good, able to prevent the entry of competitors, and for whose product there is no very close substitute.
- The word "monopoly" comes from the Greek words "monos polein" which mean "alone to sell".
- A monopoly does not necessarily imply that there is a single producer. The essence of a monopoly is that there is a single supplier.
Measures of Monopoly Power
- The most obvious measure of monopoly power is looking at the percentage of the market which any one firm accounts for.
- A firm with a market share reaching 40% will always be deemed to have the ability to act independently on the market share and so to be in a dominant position.
- Concentration ratios are often used to measure monopoly power to see what is the percentage of the industry's output accounted for by the four firms with the largest output in the industry.
- The range of the concentration ratio is from almost 0 for perfect competition to 100 for monopoly.
Monopoly Power based on Restriction of Entry
- Monopoly power depends on some restriction of entry into the particular market.
- Barriers to entry protect the monopolist from new firms.
- Types of barriers to entry:
- Legal Barriers: legal monopoly, patent, copyright, license, and franchise.
- Natural Barriers: natural monopoly, economies of scale, and economies of scope.
- Other barriers: ownership of a key resource, special factors, transport costs, secret process, artificial barriers, and reputation.
Price and Output Decisions under Monopoly
- The demand curve facing the monopolist is the market demand curve which is downward sloping.
- The average revenue curve coincides with the demand curve.
- The marginal revenue curve slopes downwards and lies below the average revenue curve.
- The monopolist would never expand into the inelastic region of the demand curve.
- The profit-maximising monopolist will always operate in the elastic region of the demand curve.
- The profit-maximising level of output for a monopolist is the one at which marginal revenue equals marginal cost.
- The monopolist faces a downward-sloping demand curve and its marginal revenue curve falls twice as much as fast as average revenue.### Monopoly and Perfect Competition
- Monopoly: a single firm produces the entire market output in a particular industry
- Perfect Competition: many firms produce a homogeneous product, and no single firm can influence the market price
Short-Run and Long-Run Analysis of Monopoly
- In the short run, a monopolist operates where MR = MC, and produces OQ* output, charging OP* price
- The monopolist suffers losses equal to area CABP* due to inability to cover total costs
- In the long run, a monopolist will exit if it cannot cover all costs; LRMC = MR, and P ≥ LRAC
Comparison of Perfect Competition and Monopoly
- Perfectly competitive industry produces where supply curve (MC curve) cuts the demand curve
- Monopolist produces where MC curve cuts the MR curve
- Under monopoly, price is higher, output is lower, and there is a loss of consumer surplus
- Deadweight loss occurs due to under-consumption of the product
Disadvantages of Monopoly
- Higher price, lower output, and deadweight loss
- Allocative inefficiency, as price is higher than marginal cost
- Lack of variety and choice for consumers
- Potential for abuse of power and discouragement of research
Advantages of Monopoly
- Exploiting economies of scale, leading to lower unit costs and prices
- Innovation and research may be encouraged due to assured profits
- Stability of employment, output, and price
- Ability to compete overseas and develop large firms
Price Discrimination
- Charging different prices to different consumers for the same product
- Requires:
- Imperfect market
- Separated markets or segments
- No "seepage" between markets
- Different elasticities of demand
- Can be beneficial in certain cases, such as spreading the load and providing services to those who cannot afford them
Public Policy towards Monopoly
- Regulation: government regulates the behavior of monopolists
- Increasing competition: removing barriers to entry, restructuring the market, and promoting competition policy
EU Competition Policy
-
Prohibits anti-competitive practices and abuse of dominant position
-
Regulates mergers and state subsidies to ensure fair competition### Types of Pricing Strategies
-
Profit-maximising pricing: set price where MR = MC
-
Average Cost Pricing: set price equal to average cost (P = AC)
-
Marginal Cost Pricing: set price equal to marginal cost (P = MC)
Price Capping
- Figure 9.9: illustrates how price capping works
- Imposed by regulators to prevent monopolies from charging high prices
Government Policies to Deal with Monopoly
- Regulation: to make markets operate more efficiently and champion consumer welfare
- Public Ownership: government runs natural monopolies, common in European countries
- Privatisation: transfer of ownership from state to private sector
- Taxation of monopoly profits: to improve equity and return consumer surplus to taxpayers
- Granting of subsidies: to reduce marginal cost of production and promote allocative efficiency
Privatisation
- Transfer of ownership of public sector assets to the private sector
- Deregulation or liberalization: removal of government regulation to promote competition
- Contracting-out, competitive tendering or franchising: private firms undertake services previously carried out in the public sector
- Marketisation or commercialization: increased market provision of services previously undertaken in the non-market sector
Conclusion
- Monopoly has a bad reputation, but some argue it's necessary for innovation and R&D
- Government must balance regulation to protect consumers and allow monopolies to operate efficiently
- International considerations and political factors affect regulation of monopolies
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Description
Learn about the concept of monopoly in economic theory, its definition, and characteristics. Understand how it differs from a single producer and examples of monopolies.
