Monopoly slides slg (1)


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  • 1. British Telecom building and maintaining the UK telecommunications network for the broadband industry – especially the ‘final mile’ copper wiring from the local exchanges to each household 2. The Royal Mail’s postal distribution network – collection / sorting / delivery 3. Virgin Media owning and running the cable telecommunications network 4. Camelot operating the national network for the UK lottery 5. National Rail owning, maintaining and leasing out the UK rail network 6. National Grid plc which owns and operates the National Grid high-voltage electricity transmission network in England and Wales. Since April 1, 2005 it also operates the electricity transmission network in Scotland. Owns and operates the gas transmission network (from terminals to distributors). 7. London Underground9. National Air Traffic Services
  • An important point is that a natural monopoly does not mean that there is only one business operating in the market or that only one firm can survive in the long run. Indeed there may be many smaller businesses operating profitably in smaller ‘niche’ segments of a market (however that is defined).
  • Monopoly slides slg (1)

    1. 1. Objectives: By the end of this section you should be able to: 1) State the characteristics of Monopoly 2) Draw the monopoly diagram 3) Explain how Monopolies exist in the long run 4) Analyse the case against Monopoly (using efficiency arguments) 5) Analyse the case for Monopoly (using efficiency arguments)
    2. 2. Efficient Market Structure An efficient market structure is allocatively efficient (P=MC) and productively efficient (produce at the lowest point on the AC curve Revenue/ costs MC 1) Firms are price LRAC P D=MR=AR takers, they face a perfectly elastic demand curve 2) No abnormal profits can be made because of perfect knowledge, so no incentive of firms in and out of the industry 3) Long run equilibrium is established 4) AC=AR=MR=MC Output
    3. 3. Price The case against monopoly Price is higher (Pm) than MC it would be in a competitive market (P*) where price would equal to MC. Pm Output is lower (Q) than it would be in a competitive market (Q*) P* The result is allocative inefficiency and a loss of economic welfare D=AR Q MR Q* Output
    4. 4. Price The case against monopoly Unit cost is higher (C) than it would MC be in a competitive AC market (C*) where only normal profit would be made in the long run Pm C C* D=AR Q MR Q* Output The result is productive inefficiency
    5. 5. The case against monopoly Allocative inefficieny – P greater than MC Productive inefficiency Exploit customers Loss of consumer surplus Managerial slack Stagnates economic growth Waste of economic resources Dynamic inefficiencies
    6. 6. The case against monopoly: BAA BAA airport ownership criticised BAA break-up order expected Ryanair boss says he 'welcomes' BAA ruling BAA agrees Gatwick airport sale BAA: Airport sale ruling 'draconian' Watch the following video clips, take some notes and then have a go at the data response question on BAA
    7. 7. DISCUSSION: Is there a case for monopoly? Dynamic efficiency Productive efficiency Economies of Scale International trade ESSAY TASK: Discuss the extent to which the monopoly provision of transport services is beneficial to producers and consumers. [20]
    8. 8. DEFINITION: Where a monopolist has overwhelming cost advantage FACTS: Occurs when one large business can supply the entire market at a lower price than two or more smaller ones There cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices There is room for only one firm to fully exploit all of the available internal economies of scale An industry where the long run average cost curve falls continuously as output expands
    9. 9. Railtrack 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, Railtrack was privatised but by 2001 it was bankrupt with debts of £3.3 billion and making an operating loss of £534 million. It was taken back into Government control and is operated as a ‘not for profit’ organisation Network Rail National 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
    10. 10. Falling LRAC curve due to continuing economies of scale Price Monopolist would operate where MC=MR and charge Pm, provide Qm output and make abnormal profits Pm In an efficient market price would be set at Pc and provide output Q2, where P=MC, however this is a loss making position Output beyond Qm is required The monopoly therefore has to be subsidised on the grounds that what it is providing is an essential public service X AC Pc D=AR MR Qm Q2 Output MC