Monopoly and Market Failure

AS Economics

Aims and Objectives

Aim: Understand how monopolies cause market failure Objectives: Recap on barriers to entry Define a natural monopoly Provide examples of different monopolies Analyse the effects of a monopolistic market

Starter
Write

down as many barriers to entry as you can for a monopolistic market. the diagram to show a monopolistic firm restricting output.

Draw

Natural Monopoly
A

market in which there is only room for one firm benefitting to the full, from economies of scale. Until recently utility companies were monopolies, until they were privatised in the 1980s.

Opening Up Royal Mail to Competition

Royal

Mail Case Study

Geographical Monopoly

Single grocery store in a village or a single petrol station on a busy road. Local market of the store is too small for another shop. Oil company uses property rights to exclude rivals. People can of course shop elsewhere and fill up elsewhere, however it is costly and inconvenient to do so, meaning the shop and station has a great deal of market power.

Government Created Monopolies

Coal,

rail and steel were nationalised companies. Were privatised in 1970/80s. Government believed that a state monopoly would allocate resources more efficiently than a private firms.

How Economies of Scale may Justify a Monopoly

Average Cost
A monopoly benefitting from economies of scale Average cost per unit of output

C1

Q1

Quantity

Diagram Explained

Shows a natural monopoly where because of limited market size there is only room for one firm benefitting from economies of scale. Economies of scale shown by downward sloping av cost curve. A monopoly is able to produce output Q1 at an average cost of C1. Whereas competitive firms are unable to produce at this output without destroying the competitive market.

Benefits of Monopolies
The

conclusion that a competitive market produces a better allocation of resources than a monopoly depends on the assumption that no or few economies of scale exist in a competitive market.
substantial economies of scale exist monopoly may lead to a better outcome than competition.

When

Further Benefit
If

the monopolys products are protected by economies of scale or a patent, competitors cannot free ride on its success.

monopoly can use their high profits to re-invest in R&D, producing new products.

Produce yourself a set of teaching notes and the monopoly diagrams You are then to have an economist speed dating session. You will have 3 minutes to tell your hot date all about monopoly in an attempt to woo them with economics knowledge. Your date will then score you out of ten.