Monopoly & Monopoly Power (AQA A Level Economics)

Characteristics of Monopoly

• A monopoly is a market structure in which there is a single seller

• There are no substitute products

• The firm has complete market power and is able to set prices and control output

  • This allows the firm to maximise supernormal profit in the short-run

  • There is no long-run erosion of supernormal profit as competitors are unable to enter the industry

• High barriers to entry exist

  • One of the main barriers is the ability of the monopoly to prevent any competition from entering the market

    • E.g. By purchasing companies who are a potential threat

• The UK Competition & Markets Authority defines a monopoly as any firm having more than 25% market share

  • It acts to prevent this from happening in most industries

Monopoly Diagram

• As a single seller of goods/services, the firm in a monopoly market is also the entire market

  • There is no differentiation between the firm and the industry

• It is a price maker

  • This means that its revenue curves are downward sloping

• In order to maximise profits, it produces at the point where marginal cost (MC) = marginal revenue (MR)

Diagram: Monopoly at Profit Maximising Equilibrium 

The firm makes supernormal profit in the short-run & long-run as the AR > AC at the profit maximisation level of output (Q₁)

Diagram analysis

• The firm produces at the profit maximisation level of output, where MC = MR (Q₁)

  • At this level, AR (P₁) > AC (C₁)

  • The firm is making supernormal profit 
    

Advantages & Disadvantages of Monopoly

• In several instances where the Competition & Markets Authority has acted to decrease/limit monopoly power, the firms have taken the Regulator to court in an attempt to convince them that the firms market power will benefit consumers

  • Theoretically, this is possible. However, in many cases the desire to maximise profits would prevent this from happening

Evaluating Monopoly Power