![]() This situation, when economies of scale are large relative to the quantity demanded in the market, is called a natural monopoly. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. In this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part. If the second firm attempts to enter the market at a larger size, like 8,000 planes per year, then it could produce at a lower average cost-but it could not sell all 8,000 planes that it produced because of insufficient demand in the market.įigure 9.2. If a second firm attempts to enter the market at a smaller size, say by producing a quantity of 4,000 planes, then its average costs will be higher than the existing firm, and it will be unable to compete. In this situation, the market has room for only one producer. Now consider the market demand curve in the diagram, which intersects the long-run average cost (LRAC) curve at an output level of 6,000 planes per year and at a price P 1, which is higher than P 0. It shows economies of scale up to an output of 8,000 planes per year and a price of P 0, then constant returns to scale from 8,000 to 20,000 planes per year, and diseconomies of scale at a quantity of production greater than 20,000 planes per year. Figure 9.2 presents a long-run average cost curve for the airplane manufacturing industry. The other is legal monopoly Home, where laws prohibit (or severely limit) competition.Įconomies of scale Home can combine with the size of the market to limit competition. One is natural monopoly Home, where the barriers to entry are something other than legal prohibition. There are two types of monopoly, based on the types of barriers to entry they exploit. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run. Barriers may block entry even if the firm or firms currently in the market are earning profits. In other cases, they may limit competition to a few firms. In some cases, barriers to entry may lead to monopoly. Once the rights to all of them have been purchased, no new competitors can enter the market. For example, there are a finite number of radio frequencies available for broadcasting. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. Barriers to entry Home are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. These profits should attract vigorous competition as described in Perfect Competition, and yet, because of one particular characteristic of monopoly, they do not. ![]() Many businesses have local monopoly power, whereas others have market power at a regional or national level.\)īecause of the lack of competition, monopolies tend to earn significant economic profits. 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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