1. The economics of market power
1. Monopoly
definition
price, output & profit
2. The welfare effects of monopoly
comparison with perfect competition
3. Competition policy

2. 1. Monopoly Competitive world Monopoly high profits - new entrants
losses - exits\closure
prices determined by the market
small firms - no market power
Monopoly
theory: single firm = industry (100% of the market)
practice: 25% or more of the market

3. 1. Monopoly A) The consequences of monopoly price, output & profit
Figure 1
Profit maximisation: MC=MR
Level of profit: AR - AC (supernormal profit)

4. Profit maximising under monopolyMC a AR AR MR O Qm Q

5. Barriers to entry B) Sustaining a competitive advantage
No, or few, substitutes. Little competition
Barriers to entry
(i) Economies of scale (cost advantage)
(ii) Government policy e.g. patents
(iii) Ownership of know-how
technological, organisational, etc.

6. Barriers to entry …. supernormal profit in the long run
(iv) Ownership of natural resources
oil, diamonds, etc.
(v) Distinctive capability e.g. being innovative
(vi) Aggressive tactics
e.g. limit pricing
…. supernormal profit in the long run

7. 2. The welfare effects of monopoly
Competitive market versus monopoly
static effects
see figure
Pm > Pc : consumer surplus, producer surplus
Qm < Qp : consumers have less choice
deadweight loss
costs & ‘X-inefficiency’ e.g.nationalised industries

8. Equilibrium of industry under perfect competition and monopoly: with the same MC curveMC P1
AR = D MR O Q1 Q

9. Dynamic effects profits - investment in R&D (large sunk costs)
large size - scale economies - lower costs - lower price
Different MC curves

10. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MCmonopoly P1
AR = D MR O Q1 Q

11. 3. Competition policy Monopoly is not always bad! Government policy
rules regarding the conduct of business
assumes: competition maximises consumer welfare
balance: competition versus MES
EU policy (McAleese) & UK policy

12. UK Policy Competition Act (1998) Competition Commission
investigate mergers & acquisitions
‘Chapter I prohibitions’
investigate agreements (written or not) which restrict or distort competition (e.g. tacit collusion)
‘Chapter II prohibitions’
conduct of firms i.e. abuse of market power
Appeals Tribunal - legal
DGFT - ‘dawn raids’

13. Conclusion Firms strive for larger profits & market domination
mergers & acquisitions
growth
barriers to entry
Market failure
justifies government intervention
competition policy