Market structure Market structure models:models:monopolymonopoly

Learning outcomes

Understand the meaning of monopoly

Use diagrams to analyse the case against monopoly

Give examples of monopoly power in transport markets

Explain different causes of monopoly power

DefinitionsTheoretical monopoly

When a firm has a 100% share of the market

Theoretical monopolyWhen a firm has a 100% share of the

market

Competition Commission

Monopolistic power exists when a firm has a market share of 25% or more

Competition Commission

Monopolistic power exists when a firm has a market share of 25% or more

Complex monopolyWhen five or fewer firms control 75% or more of a market and act jointly in a way

which reduces competition

Complex monopolyWhen five or fewer firms control 75% or more of a market and act jointly in a way

which reduces competition

Have I got monopoly news for you …

Commission to break up BAA

monopoly

Passengers ‘ ripped off’ by big bus companies

Company must sell ‘bus war’

rival

Task 1Task 1Investigate one of the news stories on the previous slide

Bus passengers ‘ripped off’ by big bus companies

Commission to break up BAA monopoly

Company must sell ‘bus war’ rival

Present your findings to the rest of your table group in the form of a factsheet

Why monopoly power existsMergers

and takeovers

Mergers and

takeovers

Entry barriersEntry

barriers

Legal monopoly

includes licensing, franchising and

patents

Legal monopoly

includes licensing, franchising and

patents

Anti-competitive behaviour

includes entry limit pricing, predatory pricing, collusion

Anti-competitive behaviour

includes entry limit pricing, predatory pricing, collusion

Economies of scale

Economies of scale

Price and output in Price and output in monopolymonopolyPrice

Output

D=AR

MR

MC

Q

P

AC

C

The case against The case against monopolymonopolyPrice

Output

D=AR

MR

MC

Q

Pm

P*

Q*

Price is higher (Pm) than it would be in a competitive market (P*) where price would equal to MC.

Output is lower (Qm) than it would be in a competitive market (Q*)

The result is allocative inefficiency and a loss of economic welfare (can you show it?)

The case against The case against monopolymonopoly Static efficiency losses

monopolies are a cause of allocative inefficiency since P > MC, resulting in a lower level of economic welfare

there is a loss of consumer surplus caused by the high prices of monopoly markets

the lack of competition may lead to managerial slack (rising costs)

Dynamic efficiency losses if barriers to entry are high enough to restrict entry it

may be that monopolies engage in less investment than in a more competitive market, leading to dynamic as well as static inefficiencies

Case study: airline Case study: airline monopoliesmonopolies Until February 1994, Aer Lingus monopolised air travel

between Dublin and Scotland (Glasgow), carrying approx 5,700 passengers per month at return fares between £69 to £186

Ryanair then entered the market by flying to Prestwick, charging £55 - £75 return

Analysts doubted that both firms could survive in what was a sluggish, low growth market

By February 1995, Ryanair were carrying over 11,000 passengers per month and Aer Lingus 6,400

Similar effects were witnessed on the Dublin-Manchester route and London-Dublin route

A good illustration of how high prices restricted demand and growth of demand until competition arrived

Research tasksResearch tasks Log on to the VLE

In groups,• Choose one of the two research tasks

– OFT report on the UK bus industry– Competition Commission investigation in BAA’s monopoly

• Once you have done your research, produce– a ppt presentation to explain your main findings to the rest

of the class– an A4 factsheet summarising your findings and showing how

they relate to the theory we have covered in class

BAA airport ownership criticised

BAA break-up order expected

BAA: Airport sale ruling 'draconian'

BAA agrees Gatwick airport sale

Watch the video clips, add to your notes and then have a go at the data response question on BAA

Ryanair boss says he 'welcomes' BAA ruling

Case studyCase study

The case for monopolyThe case for monopoly

There are three arguments that can be used to justify monopoly power dynamic efficiency

– reinvestment of abnormal profit productive efficiency

– economies of scale ‘natural’ monopoly

– competition may be too costly

DISCUSSION: Is there a case for monopoly?

Economies of scaleEconomies of scalePrice

Output

D=AR

MR

MCm

Qc

Pm

Pc

Qm

A monopoly has lower unit costs than competitive firms because of EoS

Its MC curve is further to the right (MCm rather than MCc)

The result is that monopoly output is higher and price lower than in a competitive market structure

MCc

Natural monopolyNatural monopolyPrice

Output

D=AR

LRAC

½Q

C1

C2

Q

A natural monopoly arises when EoS are large in comparison to market demand

If one firm supplies the market it does so at lower AC

The result is that monopoly is productively efficient - AC is lower and TC is lower

Rail infrastructure is considered to be a natural monopoly – associated with enormous economies of scale, 21,000 miles of rail lines, tunnels, bridges, level crossings, stations, signals etc.

The very high costs of laying track and building a network, as well as the costs of buying or leasing the trains, would prohibit, or deter, the entry of a competitor

In 1996, rail infrastructure was privatised as Railtrack but by 2001 it was bankrupt with debts of £3.3 billion and making an operating loss of £534 million. It is now operated as a ‘not for dividend’ organisation - Network Rail

Network Rail runs the network – but train operating companies have to bid for the franchise to run passenger services – and the industry regulator can take their franchise away if the quality of service isn’t good enough

To society, the costs associated with building and running a rival network would be wasteful

More evaluation of More evaluation of monopolymonopolyThreat of regulation

• there may not be allocative efficiency if monopolists believe that abuse of market power will results in investigation by competition authorities (Competition Commission or Office of Fair Trading)

Threat of new entrants• new entrants may find ways around entry barriers

(eg low cost airlines), so that the market becomes contestable

• rather than attract new entrants, monopolists may simply behave (set P = MC)