![]() Over time monopolist can gain power over the consumer, which results in an erosion of consumer sovereignty. Consumer surplus is the extra net private benefit derived by consumers when the price they pay is less than what they would be prepared to pay. Less consumer surplusĪ rise in price or lower output would lead to a loss of consumer surplus. Monopolists can also restrict output onto the market to exploit its dominant position over a period of time, or to drive up price. This is especially problematic if the product is a basic necessity, like water. Monopolies can exploit their position and charge high prices, because consumers have no alternative. The costs of monopoly Less choiceĬlearly, consumers have less choice if supply is controlled by a monopolist – for example, the Post Officeused to be monopoly supplier of letter collection and delivery services across the UK and consumers had no alternative letter collection and delivery service. ![]() Evaluation of monopolyįollowing Adam Smith, the general view of monopolies is that they tend to seek out ways to increase their profits at the expense of consumers, and, in so doing, generate more costs to society than benefits. Vertical integrationį or example, if a brewer owns a chain of pubs then it is more difficult for new brewers to enter the market as there are fewer pubs to sell their beer to. Exclusive contractsį or example, contracts between specific suppliers and retailers can exclude other retailers from entering the market. I f consumers are loyal to a brand, such as Sony, new entrants will find it difficult to win market share. H eavy expenditure on advertising by existing firms can deter entry as in order to compete effectively firms will have to try to match the spending of the incumbent firm. S unk costs are those which cannot be recovered if the firm goes out of business, such as advertising costs – the greater the sunk costs the greater the barrier. If the set-up costs are very high then it is harder for new entrants. For example, British Telecom owns the network of cables, which makes it difficult for new firms to enter the market. This is often the case with natural monopolies, which own the infrastructure. L imit pricing is a specific type of predatory pricing which involves a firm setting a price just below the average cost of new entrants – if new entrants match this price they will make a loss! Perpetual ownership of a scarce resourceįi rms which are early entrants into a market may ‘tie-up’ the existing scarce resources making it difficult for new entrants to exploit these resources. T his involves dropping price very low in a ‘demonstration’ of power and to put pressure on existing or potential rivals. I f the costs of production fall as the scale of the business increases and output is produced in greater volume, existing firms will be larger and have a cost advantage over potential entrants – this deters new entrants. Monopoly power can be maintained by barriers to entry, including: Economies of large scale production Maintaining monopoly power – barriers to entry When firms merge to given them a dominant position in a market.When firms have patents or copyright giving them exclusive rights to sell a product or protect their intellectual property, such as Microsoft’s ‘Windows’ brand name and software contents are protected from unauthorised use.When governments grant a firm monopoly status, such as t he Post Office. ![]() When a firm has exclusive ownership or use of a scarce resource, such as British Telecom who owns the telephone cabling running into the majority of UK homes and businesses.Monopolies are formed under certain conditions, including: ![]() See Competition Act.įor the purpose of controlling mergers, the UK regulators consider that if two firms combine to create a market share of 25% or more of a specific market, the merger may be ‘referred’ to the Competition Commission, and may be prohibited. While there only a few cases of pure monopoly, monopoly ‘power’ is much more widespread, and can exist even when there is more than one supplier – such in markets with only two firms, called a duopoly, and a few firms, an oligopoly.Īccording to the 1998 Competition Act, abuse of dominant power means that a firm can ‘behave independently of competitive pressures’. A pure monopoly is defined as a single supplier.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |