![]() ![]() Scale economies and diseconomies define the shape of a firm's long-run average cost (LRAC) curve as it increases its output. Although these barriers might allow one firm to gain and hold monopolyĬontrol over a market, there are often forces at work that can erode this control. These barriers may be interrelated, making entry that much more formidable. Position in the ownership of some of the inputs required to produce the good, and government restrictions. They include economies of scale, special advantages of location, high sunk costs, a dominant Why are some markets dominated by single firms? What are the sources of monopoly power? Economists have identified a number of conditions that, individually or in combination, can lead to domination of a market by a single firm and create barriers thatīarriers to entry are characteristics of a particular market that block new firms from entering it. The result is a model that gives us important insights into the nature of the choices of firms and their impact on the economy. Our analysis, not to describe the real world. As always with models, we make the assumptions that define monopoly in order to simplify Such conditions are rare in the real world. In assuming blocked entry, we assume, for reasons we will discuss below, that no other firm can enter that market. In assuming there is one firm in a market, we assume there are no other firms producing goods or services that could be considered part of the same market as that of the monopoly firm. ![]() We shall see in the next chapter that monopolies are not the only firms that have this power however, the absence of rivals in monopoly gives it much more price-setting power.Īs was the case when we discussed perfect competition in the previousĬhapter, the assumptions of the monopoly model are rather strong. A firm that acts as a price setter possesses monopoly power. The entry of new firms, which eliminates profit in the long run inĪ competitive market, cannot occur in the monopoly model.Ī firm that sets or picks price based on its output decision is called a price setter. It selects from its demand curve the price that corresponds to the quantity the firm has chosen to produce in order to earn the maximum profit possible. In the case of monopoly, entry by potential rivals is prohibitively difficult.Ī monopoly does not take the market price as given Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering. There are no close substitutes for the good or service a monopoly produces. Monopoly is at the opposite end of the spectrum of market models from perfect competition. Define what is meant by a natural monopoly.List and explain the sources of monopoly power and how they can change over time.Define monopoly and the relationship between price setting and monopoly power.Many businesses have local monopoly power, whereas others have market power at a regional or national level. Monopoly power enjoyed by a firm depends in part on how the market is defined. The UK Competition and Markets Authority (CMA) describes a working monopoly as any firm with more than 25% of industry sales.Ī dominant firm is one which accounts for a significant share of a given market and has a significantly larger market share than its next largest rival.ĭominant firms are typically considered to have market shares of 40 per cent or more.Ī near pure monopoly occurs when one firm has a market share in excess of 90 percent.īut more realistically, a near pure monopoly can exist when one seller has more than three quarters of a market defined in a certain way. Explain and evaluate the potential costs and benefits of monopoly to both firms and consumersĪ monopoly in its purest form is when one single business dominates the whole market – it has 100% concentration.Explain and evaluate the differences in efficiency between perfect competition and monopoly.Understand the characteristics of this model and be able to use them to explain the behaviour of firms in this market structure.What is a monopolistic market? This study note covers the essential of monopoly as a market structure.
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