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  1. 1. Market Structures: Monopoly Week 8
  2. 2. Barriers to Entry <ul><li>The Long run </li></ul><ul><ul><li>Barriers to entry: imply that a monopolist can still earn supernormal profits in the long run </li></ul></ul><ul><li>Define: </li></ul><ul><li>Barriers to entry : Anything that prevents or impedes the entry of firms into an industry thereby limiting the amount of competition faced by the existing firm </li></ul><ul><li>  Forms of barriers to entry </li></ul><ul><li>Economies of Scale </li></ul><ul><ul><li>Large scale of production leads to lower costs of production </li></ul></ul><ul><li>  </li></ul>
  3. 3. Natural Monopoly <ul><li>The case of a natural monopoly </li></ul><ul><ul><li>Arises when the level of the quantity demanded only allows a single firm to benefit from economies of scale. </li></ul></ul>
  4. 4. Barriers to entry <ul><li>Economies of Scope </li></ul><ul><ul><li>A firm producing a variety of products is likely to experience lower production costs </li></ul></ul><ul><li>Product differentiation and brand loyalty  </li></ul><ul><li>Ownership of, and control over wholesale or retail outlets </li></ul><ul><li>Legal protection </li></ul><ul><ul><li>Patents </li></ul></ul><ul><ul><li>Licences </li></ul></ul><ul><li>Aggressive tactics </li></ul><ul><ul><li>Price wars </li></ul></ul><ul><ul><li>Massive advertising campaigns </li></ul></ul><ul><ul><li>Attractive after sales service </li></ul></ul><ul><li>  </li></ul><ul><li>  </li></ul>
  5. 5. Limit Pricing <ul><li>Limit pricing – monopolist charges a price below the short run profit-maximising level in order to deter new entrants. </li></ul><ul><ul><li>Barriers to entry of new firms are not total </li></ul></ul><ul><ul><li>Very large supernormal profits attracts new potential entrants </li></ul></ul><ul><ul><li>The monopolist deliberately keeps its price down thereby restricting profits </li></ul></ul><ul><ul><li>This is done in order to discourage new entrants </li></ul></ul><ul><ul><li>  </li></ul></ul>
  6. 6. Limit pricing
  7. 7. Monopoly and public interest <ul><li>Disadvantages of a monopolist </li></ul><ul><ul><li>Higher price and lower output than under perfect competition </li></ul></ul><ul><ul><li>Allocatively inefficient : P>MC </li></ul></ul><ul><ul><li>X-inefficiency </li></ul></ul><ul><ul><ul><li>There is no pressure on profit margins hence cost control becomes lax </li></ul></ul></ul><ul><ul><ul><li>Overstaffing </li></ul></ul></ul><ul><ul><ul><li>Spending on prestigious buildings and equipment that do not enhance productivity </li></ul></ul></ul>
  8. 8. Advantages of a monopoly <ul><li>Economies of scale due to larger plant </li></ul>
  9. 9. Advantages <ul><li>Supernormal Profits allow research and development </li></ul><ul><ul><li>Increases efficiency and lower costs of production </li></ul></ul><ul><li>Competition for corporate control </li></ul><ul><ul><li>Inefficient monopolies face the risk of a take over bid from another company. </li></ul></ul><ul><ul><li>Fear of being taken over by another firm may forces monopolies to be efficient </li></ul></ul>
  10. 10. The Theory of Contestable markets <ul><li>Arises when barriers to entry are not total </li></ul><ul><li>The mere threat of entry will have the same effect as actual competition. </li></ul>
  11. 11. Monopoly and the dead weight loss
  12. 12. Efficiency losses under monopoly <ul><li>Allocative inefficiency under monopoly </li></ul><ul><ul><li>Under perfect competition P=MC but under monopoly P>MC </li></ul></ul><ul><li>Productive inefficiency under monopoly </li></ul><ul><ul><li>In the long run perfect competition produces at the bottom of the ATC so P=min (ATC). Under the monopoly there is no pressure to minimise costs so that P = min (ATC)   </li></ul></ul><ul><li>Deadweight loss </li></ul>