What is a Monopoly?

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Anand Thanky                

Monopoly

  1. Define a monopoly – Explain how they can develop

  1. What are the sources of monopoly power? Evaluate using examples

  1. Diagrammatical analysis of the monopoly diagram

  1. Are monopolies a bad thing? Cost Benefit Analysis

  1. Monopoly case study


Define a monopoly – Explain how they can develop.

What are the sources of monopoly power? Evaluate using examples

The word monopoly comes from the Greek words monos, ones and polein, to sell. When a market is analysed by economists it can be placed on the scale below. Most markets will be in the middle of the two extremes; in this essay I shall be ananlysing the monopoly extreme.

In economics, a monopoly is defined as a market situation where there is only one provider of a product or service. Monopolies are characterised by a lack of economic competition for the good or service that they provide as well as high barriers to entry for potential competitors in the market. When a firm has 100% percent market share, only then can it be classified as a monopoly because no one else can compete against them. Despite this, a firm does not always need a 100% market share to be a monopoly, if the firm is extremely large compared to other firms in the market then other will not be able to compete at the same level, reasons for this could be that larger firms will have cheaper prices because they will enjoy economies of scale, so they will always be making a profit while other firms will suffer as they try to establish themselves.

Monopolies main source of power is that they enjoy economies of scale; due to this they can cut costs therefore resulting in cheaper prices of goods.

Monopolies set the market price for goods, consumers take this price as competition is scares and substitutes do not exist.

A monopoly is likely to set its price where marginal cost equals marginal revenue, as seen on the diagram below. This can be seen on a supply and demand diagram for the firm, where quantity is Qm and price is at Pm. This is the competitive price of Pc and with a smaller quantity that the competitive quantity of Qc. The profit the business gains; is the shaded area, labelled profit.


Monopolies develop in various ways, horizontal integration, vertical integration, creation of a statutory monopoly, franchises and licences, internal expansion of a firm etc.

Horizontol Intergration

This is when two firms merge who are at the same stage of production in the same industry. An example of this would be a bank successfully mergring with another, e.g. In 1995 Lloyds merged with TSB to form Lloyds TSB, and in 2004 Morrisons took over Safeway.

Vertical Integration

This is when a firm deveolps their market power by integrating with different stages of production in the same industry. A business may buy out its suppliers or the retailers. A good example of this is the oil industry, where many of the leading companies are both producers and refiners in crude oil. This results in one company taking over all the stages of production.

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Creation of a Statutory Monopoly

When a policy of nationalisation was being pursued, key industries were taken over into state ownership and run as public corporations with monopoly status. An example of this is the Royal Mail (also known as Consignia), which has had a statutory monopoly in delevering letters for many years. Although this is set to end as the government seeks to promote competition in the industry.

Franchises & Licences

These give a business the right to operate in a particular market and are usually open to renewal every few years, i.e. commercial television ...

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