Monopoly

Introduction to Monopoly:

Monopoly as a concentrated market appears at the opposite end of the spectrum to perfect competition. A monopolistic market is one in which only one seller operates, and from a legal perspective, if one firm oligopolists (cartel of firms acting in collusion) owns in excess of 25% of the market share a monopoly is said to exist. 

Example of monopoly in the UK: Thames Water. This is a pure monopoly to domestic customers in geographical areas, pure monopolies have a 100% market share. 

The assumed characteristics of monopoly:

• One firm - The whole output of the industry is in the hands of a single firm, there are no incumbent firms.
• There are high barriers to entry which prohibit new entry in both the long and short run. Examples of barriers to entry are

1. Capital costs and expertise - Other firms may find it difficult to enter the industry and compete with a firm with such high expertise, e.g an oil company
2. Legal restrictions - patents offer exclusive intellectual property rights to a given inventor for a given time, in example Pfizer's Viagra held a patent until 2011. Patents can help the company gain returns to breakeven and in the long run profit after the expensive R&D costs of developing the product. 
3. Control of a scarce resource or input - e.g natural monopolies. For instance 'De Beers Syndicate in South Africa enjoyed sole access to what was almost the only land on which diamonds could be mined'
4. Assymetrical Infomation
5. Advertising 
6. Brand proliferation - Firms can provide a wide rage of similar products but with different components to them to ensure new firms have difficulty in providing a niche in the market. Example the three firm concentration ratio of around 90% with Kellogg's, Weetabix and Nabisco has been produced.
7. Behavioural Barriers - such as pricing strategies e.g limit pricing, tacit pricing

• Exit barriers where in some industries there are significant costs for a firm to pay if it were ever to decide to leave the industry. Such a redundancies to workers, landscaping sites, disposal of equipment etc. These are called sunk costs 

These notes have insight from Business Microeconomics for A2 by Nutter, and the AQA Economics textbook by Lawrence and Stoddard. I do not claim this material as my own.