![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…]](https://image.slidesharecdn.com/monopolywebinar-150529100216-lva1-app6892/75/Basics-of-the-Economics-of-Monopoly-30-2048.jpg)
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Basics of the Economics of Monopoly
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.
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Basics of the Economics of Monopoly
- 1. A2 Micro: MarketStructures Economics of Monopoly Power
- 2. Monopoly Power inMarkets • A pure monopolist is a single supplier that dominates the entire market – the market has 100% concentration
- 3. Google’s Market Dominationin 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 inMarkets • 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 ofmobile 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 inMarkets • 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 MarketPower – 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 inMarkets • 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 buildingmarket 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 aworking 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 inMarkets • 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 ofMonopoly • 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 andOutput MC Price and Cost Output AC MR AR Profit Max: MC=MR P1 Q1
- 15. Monopoly Price andOutput MC Price and Cost Output AC MR AR Profit Max: MC=MR P1 Q1 C1
- 16. Monopoly Price andOutput MC Price and Cost Output AC MR AR Profit Max: MC=MR P1 Q1 C1 Supernormal Profit
- 17. Pricing power isgreater when demand is price inelastic
- 18. Profits Are Higherwith Inelastic Demand MC Price and Cost Output AC MR AR Profit Max: MC=MR P1 Q1 C1 Supernormal Profit
- 19. Barriers to Entryin 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 Entryin Monopoly Economies of scale Vertical integration Brand loyalty Control of important technologies Expertise and reputation
- 21. Monopoly and EconomicEfficiency
- 22. Economic Case AgainstMonopoly • 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 oftop 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 ForMonopoly 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 inPharmaceuticals 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 AgainstMonopoly • 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 hasValue Too!
- 29. Monopoly versus ContestableMarkets 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 InterventionReasoning 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: MarketStructures Monopoly Power