Revision:Monopoly

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A monopolist is defined as a single supplier that constitutes the whole industry. The legal definition of monopoly is a firm which has a market share greater than 25%. Monopolists tend to have the following features:

• High profit levels in comparison with the normal levels of similar levels.
• Barriers to entry and exit.
• Control over the price in the market.
• Evidence of price discrimination.
• Reduced level of service.

Assumptions of monopoly:

• One seller of the good
• No substitutes
• Barriers to entry

The monopolist is able to raise prices without competitors entering the market. This allows the firm to make abnormal profit.

The monopolist has a downward sloping demand curve because, unlike in perfect competition, when the firm raises its prices it will retain some customers. The monopolist is the only seller in the market, so the firm's demand curve is the same as that of the industry. It is a price maker and can choose its position along the curve.

Diagram of monopoly

The monopolist produces at the point where MC = MR. The output is lower and the price is higher than under perfect competition.

This is equilibrium. Profits are not eroded long run because of the existence of barriers to entry.

Monopolist making a loss

A monopolist makes a loss if its costs are greater than average revenue.

Natural monopolies

Natural monopolies occur in industries where there are no diseconomies of scale. This means that long run costs constantly fall.

The largest firm can always produce at a lower cost than any potential entrant. They are able to price any competitor out of the market.

The government may control natural monopolies. When the government nationalised many natural monopolies after the second world war, they introduced marginal cost pricing to protect the public interest.

Efficiency

• Productive efficiency is not achieved - the firm is not producing at the lowest point of the AC curve.
• Allocative efficiency is not achieved - P > MC

Comparison with perfect competition

The price is higher and the output is lower than under perfect competition. The consumer loses consumer surplus (shaded areas in the diagram).

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