Reason 1 - Monopoly elements or..

Reason 1 - Monopoly elements or market dominance

TR = total revenue
TC = total costs

MONOPOLY

What is a monopoly?

Definition: Technically a monopolist is a sole supplier, that is to say, one firm is the industry.

But there are degrees of monopoly - if one firm supplies, say, eighty per cent of the market, it is close to being a monopolist and will usually act like one.

If two (or more) firms supply most of the output, it pays them to work together, to act like a monopoly, and to keep prices high (if there are two firms we call it “a duopoly”).

Types of monopoly, (sometimes called “causes of monopoly”; "sources of monopoly"; or "conditions for monopoly"

• Economies of scale, i.e. one firm grows large, its costs fall as a result and become lower than the others, so it can reduce its price and sell more produce. The others cannot compete because they are small and higher cost. The firm grows to become the sole one, which then supplies the entire market. We
return to examine economies of scale in more detail later.

• The result of law – the government may restrict an industry to one huge nationalised firm, e.g., British Steel in 1964 - or a trade union can have a monopoly over the supply of one kind of labour – the British Medical Association for instance is the trade union for doctors and can strongly influence their supply.

• An agreement between firms, so that all act together as one monopolist - often it is illegal but it happens. We call this a cartel. This can happen under oligopoly conditions (which are covered later).

• Exclusive ownership of a unique resource: perhaps there is only one source of supply of a raw material, e.g., all the known supply of iron ore in Australia was once in the hands of a company called BHP, until new sources were discovered. As another example, in South Africa, de Beers once owned virtually all the diamond mining and it still has control over much of the
global diamond supply.

• Copyrights, patents and licences are particular forms of this exclusive ownership.

• So-called natural monopoly. This is often the result of economies of scale - e.g., electricity supply, telephone supply, or railways - because we do not want twenty different sets of rail lines, all parallel, between London and Birmingham!

Problems with monopoly (what is wrong with monopoly or "the welfare effects of monopoly")

• It limits output and keeps price high - as just said. Really this means that a monopolist misallocates (and misuses) resources.

• This behaviour of the monopolist redistributes income from all the consumers of the product (they are paying more than they need) to one firm or person (the monopolist). This is an equity issue.

• A monopolist may develop political and social power over others which reduces the efficiency of democracy and the amount of equity. There is a strong political danger from a very few rich and powerful people emerging
and changing the course of events. Conrad Black? Robert Maxwell? It seems to be most serious in the media area, like newspapers or TV, as they can influence the way people think or what they believe.

• A monopolist may behave badly in an anti-social way. For instance, he or she may force out a potential rival firm by selling at give-away prices (well below cost). After they have forced out the honest competitor, they will put the price back up again.

• **5. Lack of competition tends to encourage inefficiency in the firm. The monopolist tends to rest on his laurels, has no need to try hard, and lacks dynamism – this is probably the main criticism - said Austin Robinson.

• As a result, we can get the emergence of lazy managers and owners.

• And it may mean that technical progress is slow, leading to slow growth of the country as a whole, and a lower standard of living than we could enjoy.

• A monopoly breeds inefficiency which means that the cost curves will be higher than they need be; this means that the intersection of MC and MR may be higher.

• Resources are misallocated - too many are going to the monopolist who does not fully use them. This is a waste for society. It really means that the price mechanism is prevented from working efficiently.

• A monopoly may reduce consumer choice. He may ignore small market demands as he cannot be bothered to meet them. As Henry Ford is reputed to have said about his motor cars “You can have any colour you want, as long as it’s black”.

Monopoly equilibrium

The starting place: identify where MC=MR and set the quantity! Later we read the price off the demand
(average revenue) curve, to determine the amount of monopoly profit in equilibrium.

A quick question: which of the following 10 main economic goals does monopoly hurt?

1. To maximise (raise) economic growth.
2. To minimise (reduce) unemployment.
3. To end (reduce) inflation.
4. To increase the standard of living.
5. To keep a satisfactory balance of payments.
6. To maintain a satisfactory international value of the currency (£).
7. To allocate resources in the best way (to meet the needs of society).
8. To obtain an acceptable distribution of income.
9. To look after the environment.
10. To avoid unwanted fluctuations in above items.

THINK FIRST; WRITE DOWN THE NUMBERS YOU THINK MONOPOLY DAMAGES – THEN TURN TO THE NEXT PAGE AND CHECK

If not in equilibrium, the monopolist is not maximising profit. If for instance price is above marginal revenue and marginal cost AND MR is greater than MC (I.e. anywhere to the left of Q) profit can be increased by producing more and moving to quantity OQ.

[ANSWERS TO THE EARLIER QUESTION

The long run damaging effects may include slower growth; a lower standard of living; higher unemployment (because employ fewer); higher prices; a slightly poorer balance of payments; less equal income distribution; and poor resource allocation.
That is to say, most of the goals! In the exam room, the inefficiency in resource allocation, the higher costs, and the monopoly profit are usually worth stressing. ]

Benefits of Monopoly

There are few benefits really - economists are almost united in opposition to monopolies, and many are against both public and private ones – those on the political left wing tend to prefer public ones more than those on the right wing.

Economists usually favour reducing or ending monopolies and increasing competition.

BUT some defence is possible!

• The monopoly profits can be used for research and development, leading to product improvement, faster growth, and lower costs.

Joseph Schumpeter's argument on innovation - that big firms are the only ones able to afford the necessary laboratories and research staff – may apply.

Against this, research shows that many breakthroughs come from smaller firms, not the large ones. For instance, Apple computers began in a garage.

• A monopolist may reap economies of scale, e.g., the Royal Mail, telephone lines, electricity supply, gas supply, or the railways. This means lower costs.

• A redistribution of income is not too bad perhaps:
It is always happening in a dynamic economy anyway. If necessary, it can be corrected by government action.