This document discusses monopoly power in markets. It defines a pure monopolist as a single supplier that dominates an entire market with 100% concentration. In reality, a working monopoly is deemed to be any firm with over 25% market share, while a dominant firm has at least 40% share. Monopolies can lead to higher prices and lower output compared to competitive markets. However, monopoly power also allows firms to invest profits into research and development. There are economic arguments both for and against monopolies, and intervention may or may not be effective depending on the specific market.

1. A2 Micro: Market Structures
Economics of Monopoly Power

2. Monopoly Power in Markets
• A pure monopolist is a single supplier that
dominates the entire market – the market has
100% concentration

3. Google’s Market Domination in the UK
Market share of search engines held by Google in the UK from December
2012 to October 2014
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Dec
12
Jan
13
Feb
13
Mar
13
Apr
13
May
13
Jun
13
Jul
13
Aug
13
Sept
13
Oct
13
Nov
13
Dec
13
Jan
14
Feb
14
Mar
14
Apr
14
May
14
Jun
14
Jul
14
Aug
14
Sep
14
Oct
14
Marketshare

4. Monopoly Power in Markets
• A pure monopolist is a single supplier that
dominates the entire market – the market has
100% concentration
• In reality – the UK Competition and Markets
Authority (CMA) deems that:
– A working monopoly is any firm with greater than
25% of the industries' total sales

5. Market share of mobile handset manufacturers in the UK in June 2014
31.8%
22.9%
16.9%
6.7% 6.1%
3.7%
2.4% 2.1%
7.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Samsung Apple Nokia Sony HTC RIM Motorola LG Other
MarketshareA Contestable Oligopoly?
5 firm
concentration ratio
= 84.4%

6. Monopoly Power in Markets
• A pure monopolist is a single supplier that
dominates the entire market – the market has
100% concentration
• In reality – the UK Competition and Markets
Authority (CMA) deems that:
– A working monopoly is any firm with greater than
25% of the industries' total sales
– A dominant firm is a firm that has at least 40% of
their given market

7. Coca Cola’s Market Power – A Real Deal
Coca-Cola Company's market share in the United States from 2004 to 2014
43.1% 43.1% 42.9% 42.8% 42.7% 41.9% 42% 41.9% 42% 42.2% 42.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Marketshare

8. Monopoly Power in Markets
• A pure monopolist is a single supplier that
dominates the entire market – the market has
100% concentration
• In reality – the UK Competition and Markets
Authority (CMA) deems that:
– A working monopoly is any firm with greater than
25% of the industries' total sales
– A dominant firm is a firm that has at least 40% of
their given market
– Price setting power is available to any business with
a downward-sloping demand (AR) curve!

9. Globally scaled companies & market power
Express and courier service providers' global market share in 2014
19.6%
14.2%
9.4%
4.7%
3.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
UPS
FedEx
Deutsche Post DHL
Yamato Holdings
TNT Express
Market share
5 firm
concentration ratio
= 51.6%

10. Chinese firms building market share
Global market share of world's leading wind turbine manufacturers in 2014
11.6%
9.5%
9%
8.7%
7.3%
5.5%
4.8%
4.5%
3.9%
3.7%
3.3%
3.2%
2.8%
2.4%
2.1%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
Vestas (Denmark)
Siemens (Germany)
Goldwind (China)
GE Energy (U.S.)
Enercon (Germany)
Suzlon (India)
United Power (China)
Gamesa (Spain)
Mingyang (China)
Envision (China)
XEMC (China)
Sewind (China)
Nordex (Germany)
DEC (China)
CSIC Haizhuang (China)
Market share

11. VW has a working monopoly in the EU
Selected passenger car manufacturers' European* market share in 2014,
based on new registrations
25.5%
10.7%
9.5%
7.3%
7.1%
6.4%
5.9%
5.4%
4.3%
3.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
VW Group
PSA Group
Renault Group
Ford
General Motors / Opel
BMW Group
FCA Group
Daimler
Toyota Group
Nissan
Share of total sales

12. Monopoly Power in Markets
• Monopoly power depends in part on how we define
the scope and size of the market
• Often makes sense to judge a monopoly on a case-
by-case basis
• Global / National / Regional / Local
• Industry by segment
• Postal Services
– Letters
– Parcels
• Water industry
– Regional monopolies
• Pubs – rural v urban areas

13. Key Features of Monopoly
• Price setting power
– Therefore a downward sloping AR & MR curve
– Potential for price discrimination
– Firms can set prices or quantities but not both!
• Barriers to entry
• Imperfect information
• Profit maximisation is assumed but the actual
conduct of firms with market power is often
different especially in an oligopoly!

14. Monopoly Price and Output
MC
Price
and
Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1

15. Monopoly Price and Output
MC
Price
and
Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1

16. Monopoly Price and Output
MC
Price
and
Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1
Supernormal Profit

17. Pricing power is greater when
demand is price inelastic

18. Profits Are Higher with Inelastic Demand
MC
Price
and
Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1
Supernormal Profit

19. Barriers to Entry in Monopoly
• Block potential entrants from making a profit
• Protect the monopoly power of existing firms
• Maintain supernormal profits in the long run
• Barriers to entry make a market less contestable

20. Barriers to Entry in Monopoly
Economies of scale Vertical integration Brand loyalty
Control of important
technologies
Expertise and
reputation

21. Monopoly and Economic Efficiency

22. Economic Case Against Monopoly
• Prices higher than under competitive conditions
– Leads to loss of allocative efficiency
– Regressive effects on lower income households
• Absence of genuine market competition may lead
to production inefficiencies
– X-Inefficiencies such as wasteful production and
advertising spending
– Higher prices can limit the final output and lead to fewer
economies of scale being exploited
• Protected markets – less drive to innovate
• Monopoly may get too big – diseconomies of scale

23. Profit margin of top 10 global pharmaceutical companies in 2013
43%
24%
22% 21% 20% 19%
16%
11% 10% 10%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Pfizer
(U.S.)
Roche
(CH)
AbbVie
(U.S.)
GSK (UK) Eli LillyEli
Lilly (U.S.)
Johnson &
Johnson
(U.S.)
Novartis
(CH)
Sanofi
(France)
Astra
Zeneca
(UK)
Merck
(U.S.)
ProfitmarginMonopoly Profits Can Be Very High

24. Cost & Price
Output (Q)
Cost & Price
Output (Q)
Perfectly Competitive Market Pure Monopoly Market
S1
D1
P1
P2
Entry of
new firms
drives
price
lower
AC
MC
AC
MC
Monopoly
demand
(AR)MR
P1 P1
Q1 Q2
P2
C2
Monopoly
Profit
S2
Monopoly usually results in higher prices and lower output
Economic Case Against Monopoly

25. Economic Case For Monopoly Power
• High market concentration does not always signal
absence of competition; can reflect the success of
firms in providing better-quality products, more
efficiently, than their rivals
• Key Advantages from Monopoly:
1. Profits used to fund investment & research
2. Natural monopoly – economies of scale
3. Domestic monopoly faces global competition
4. Monopolistic firms can be regulated – i.e. industry
regulator acting as a proxy consumer
5. Price discrimination may help some consumers

26. Research Spending in Pharmaceuticals
Top global pharmaceutical companies by prescription sales and R&D
spending in 2013 (in billion U.S. dollars)
9.36
6.25
8.29
6.12
7.12
5.04
5.81
4.27
5.32
2.83
3.94
1.42
2.71
2.09
46.02
45.01
39.14
37.7
37.52
33.06
26.48
24.52
20.12
18.79
18.19
17.56
15.59
14.89
0 5 10 15 20 25 30 35 40 45 50
Novartis (Switzerland)
Pfizer (U.S.)
Roche (Switzerland)
Sanofi-Aventis (France)
Merck (U.S.)
GlaxoSmithKline (UK)
Johnson & Johnson (USA)
AstraZeneca (UK)
Eli Lilly (U.S.)
Abbvie (U.S.)
Amgen (U.S.)
Teva (Israel)
Bayer (Germany)
Novo Nordisk (Denmark)
Sales/spending in billion U.S. dollars
Research and development spending Prescription sales

27. Economic Case Against Monopoly
• Here is a good way to remember some of the issues
we have covered regarding monopoly and
economic efficiency
1. Service - does the lack of competition affect the
quality of service to consumers?
2. Prices - how high are prices compared to
competitive / contestable market
3. Efficiency - productive, allocative and dynamic
4. Welfare - what are the overall welfare outcomes?
Is there a net loss of welfare in markets dominated
by businesses with monopoly power?

28. Producer Surplus has Value Too!

29. Monopoly versus Contestable Markets
Characteristic / Issue Monopoly Contestable Market
Number of firms
Natural / Working / Dominant
Monopoly
Any number possible – usually
many
Barriers to entry High – entry and exit costs
Low – absence of sunk costs
makes market contestable
Supernormal profit High in short and long run
Threat of entry limits profits – risk
of hit and run entry
Pricing power
Pricing power is important –
may be limited by regulation
Actual and potential competition
affects pricing
Economic efficiency
Low allocative (price >MC)
Productive – econ of scale
Dynamic – use of profits
Contestability should help move
the market closer to efficient
outcomes
Innovative behaviour Potentially strong
Likely to be very strong – e.g.
disruptive technologies

30. Jean Tirole – Nobel Winner in 2014
Nobel Prize for
Economics 2014
Is awarded to………….
Jean Tirole
• Important work on regulation and on competition policy
• Sometimes better to leave monopolies alone and allow them to work with
other firms
• Always a risk of government failure with intervention
• Sector-based analysis; price caps can work in some markets but not others
• Work also included reasons to end the bank bonus culture
• Won a prize of 8 million Kronor [£750, 000…]

31. Intervention with monopoly
Intervention Reasoning Evaluation
Tax on
monopoly
profits
A one-off windfall tax on
supernormal profits from
monopoly power
Risk of tax avoidance /
loss of capital
investment spending
Liberalization of
markets
Break up monopolies – allow
smaller businesses to enter
and increased contestability
Smaller businesses may
struggle to scale up
and compete
Introduce price
capping policies
Encourages cost efficiency +
increases consumer surplus
Monopolists may find
revenues in other ways
Nationalisation
Take some monopoly utilities
back into public ownership
Possible loss of
productive efficiency

32. A2 Micro: Market Structures
Monopoly Power