Look at different types of market.

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Essay – Section B

2 a)

A utility is a good that maximises consumer consumption; therefore a utility industry is an industry that maximises consumer consumption by using that good or service provided.  This is likely to be a homogenous good, which is provided by a company like BT or POWERGEN, as both these industries are referred to in the question.  

The telecommunications industry has always been a monopoly, as other companies cannot enter the market, for example, other companies are at an immediate disadvantage because they do not have a telephone line in everyone’s house.  This is because this is a very expensive initial cost and companies are not usually likely to have the resources to be able to afford something like that.  This was an important factor; this is why BT was controlled by the government before privatisation (Thatcher, 1970s), to control the monopoly.  

This meant that BT had a natural cost advantage over competitors; this also meant that BT was the only firm in its industry (monopoly), which made the company more influential in terms of trading.  It would benefit more from trading, because BT could benefit massively from economics of scale, and also other efficient economies.  

This brings me to my next point, contestable markets.  A contestable market is a monopoly (or as defined by the UK fair trading commission, a company with over 25% of the market share) that is not necessarily disadvantageous for the consumer.  As I mentioned previously, the main influence for consumer benefits from a monopoly is the ability for the company to ‘pass on’ the money saved through economies of scale on the goods/services.

This is unlikely to happen in a monopoly, as entrepreneurs will use the profits, to increase in the profit margin.  This is because the company has little or no competition to compete with, so the efficiency is not revealed.  This means that monopoly firms will attempt to maximise profits:

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As my diagram shows, the excess profit made is (P1 – P2).  The profit maximising output is (0Q), where MC=MR.

The more important factors that stop other companies entering the market are:

  • Legal requirements – these can be for example in water markets, there is a legal requirement by health and safety which will require certain sanitary procedures during water processing.  This would also need to be checked frequently, to ensure consumer safety.
  • As I mentioned briefly previously, the high costs to enter ‘natural monopoly’ markets, which can be ...

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