Monopoly market.

Monopoly
 A pure monopoly is a single supplier in a
market. For the purposes of regulation ,
 monopoly power exists when a single firm
controls 25% or more of a particular market.
 Formation of monopolies

Where do monopolies come from?

Monopolies emerge due to a lack of competition created by

barriers to entry.

 The four main reasons for high barriers to entry are:

1. Government blocks the entry of more than one firm into

a market.
2. One firm has control of a key resource material
necessary to produce a good.
3. There are important network externalities in
supplying the good or service.

4. Economies of scale are so large that one firm

has a natural monopoly.
.1) Government blocks entry in two main
ways:

i. By granting a patent or copyright to an

individual or firm, which gives the exclusive
right to produce a product or service for a
period of time.
ii. By granting a firm a public franchise, which
makes it the exclusive legal provider of a good
or service.
2. Another way for a firm to become a
monopoly is by controlling a key
resource.
 This happens infrequently because most
resources are widely available from a
variety of suppliers.
3. Network externalities: These exist when the
usefulness of a product increases with the
number of consumers who use it.
 Network externalities can set off a virtuous cycle:
if a firm can attract enough customers initially, it
can then attract more customers, which attracts
even more customers, and so on.
4. Natural monopoly: A situation in which
economies of scale are so large that one
firm can supply the entire market at a lower
average total cost than can two or more
firms.
 A natural monopoly is a firm that has economies of scale
so large that it is possible for the single firm alone to
supply the entire market at a lower average cost than
two or more firms.

 If the market demand for a product is within the range

of falling LRATC, this means that a single large firm
can produce for the entire market at a lower average
total cost than two or more smaller fi rms. When this
occurs, the firm is called a natural monopoly.
 A natural monopoly is
illustrated in Figure below.
 There are two factors at work making for a natural monopoly:
costs and market demand. In Figure above ,
at the point where market demand, D, intersects the LRATC curve,
LRATC is still declining, meaning that economies of scale have not
yet been fully exhausted and the minimum efficient scale occurs at
a higher level of output.

 The minimum efficient scale is the lowest level of output at which

lowest average total costs are achieved . As output increases,
average costs fall, and keep on falling even beyond the point
where the entire market demand for the product is satisfied.
 In fact, natural monopoly acts as a strong
barrier to entry of new firms into the industry
because potential entrants realise that it
would be extremely difficult to attain the low
costs of the already existing fi rm.
 A natural monopoly may stop being ‘natural’ if
changing technologies create conditions that allow
new competitor firms to enter the industry and
begin production at a relatively low cost.

 Once this happens and technological changes

result in lower costs for firms, it may no longer
be the case that a single firm exhausts
economies of scale.
In a monopoly, specific sources generate the
individual control of the market. Sources of power
include:
• Economies of scale
• Capital requirements
• Technological superiority
• No substitute goods
• Control of natural resources
• Network externalities
• Legal barriers
• Deliberate actions
 Monopoly
Assumptions/characteristics of the model:
The model of monopoly rests on the following
assumptions:
i) There is a single seller or dominant firm in the market.

 When there is a single firm producing a good or service for the

entire market, it is called a pure monopoly. The firm is therefore
the entire industry.
 In the real world, a monopolistic industry may consist of one firm
that dominates the market with a very large market share. For
example, DeBeers Company of South Africa controls over 80% of
diamond sales, and is considered to be a monopoly.
ii) There are no close substitutes. If substitute
goods existed, then consumers could easily
switch to buying a substitute good, in which case
there would no longer be a monopoly for the
good in question.
 Therefore, the monopolist produces a good or
service that has no close substitutes.
iii)There are significant barriers to entry. The
monopolist owes its dominance in the market
and the absence of competitor firms partly to
the inability of other firms to enter the industry.
 Anything that prevents other firms from
entering the industry is called a barrier to
entry.
 Barriers to entry:
There are several kinds of barriers to entry.
These are described below.
 Economies of scale
Economies of scale result in the downward-
sloping portion of a firm’s long-run average total
cost curve (LRATC), permitting lower average
costs to be achieved as the firm increases its size
.
 A barrier to entry exists when economies of scale are
extensive and the LRATC curve declines over a very large
range of output. In Figure the average total costs of a
large firm on SRATC1 are substantially lower than the
average costs faced by a smaller firm on SRATC2.
 The large firm can charge a lower price than the smaller
firm, and can force the smaller firm into a situation
where it will not be able to cover its costs. Therefore, if
new firms try to enter the industry on a small scale they
will be unable to compete with the larger one.
 On the other hand, a new firm attempting to enter
the market on a very large scale so as to be able to
take advantage of economies of scale would encounter
huge start-up costs, and would be unlikely to take the
risk involved.
 Economies of scale form a significant barrier to entry in
the case not only of monopolies but also of oligopolies.
 Branding :
 Branding involves the creation by a firm of a unique image and name of a
product. It works through advertising campaigns that try to influence
consumer tastes in favour of the product, attempting to establish
consumer loyalty. If branding of a product is successful, many consumers
will be convinced of the product’s superiority, and will be unwilling to
switch to substitute products, even though these may be qualitatively
very similar.

 Branding may work as a barrier to entry by making it difficult for new

firms to enter a market that is dominated by a successful brand.

 Note that branding need not lead to a monopoly (it is a method used by
firms in monopolistic competition and oligopoly, as we will discover
below), but it does have the effect of limiting the number of new
competitor firms that enter a market. Examples of branding include
brand-name items (such as NIKE®, Adidas®, CocaCola®, etc.)
 Legal barriers
Legal barriers include the following:
 Patents are rights given by the government to a
firm that has developed a new product or invention
to be its sole producer for a specified period of
time.

 For that period, the firm producing the patented product

has a monopoly on the product. Examples include patents
on new pharmaceutical products, Polaroid and instant
cameras, Intel and chips used by IBM computers.
 Licences are granted by governments for particular
professions or particular industries.

 Licences may be required, for example, to operate

radio or television stations, or to enter a particular
profession (such as medicine, dentistry, architecture,
law and others).
 Such licences do not usually result in a monopoly,
but they do have the impact of limiting competition.
 Copyrights guarantee that an author (or an
author’s appointed person) has the sole rights to
print, publish and sell copyrighted works.

 Public franchises are granted by the

government to a firm which is to produce or
supply a particular good or service.
 Tariffs, quotas and other trade restrictions
limit the quantities of a good that can be imported
into a country, thus reducing competition.

 Not all of these legal barriers lead to monopoly,

but they all have the effect of limiting
competition, thus contributing to the creation of
some degree of monopoly power.
 Control of essential resources
 Monopolies can arise from ownership or control of an
essential resource. A classic example of an international
monopoly is DeBeers, the South African diamond
firm, that mines roughly 50% of the world’s diamonds
and purchases about 80% of diamonds sold on open
markets. Whereas it is not the sole diamond supplier,
its large market share allows it to have a significant
control over the price of diamonds.
 Aggressive tactics
 If a monopolist is confronted with the
possibility of a new entrant into the industry, it
can create entry barriers by cutting its price,
advertising aggressively, threatening a
takeover of the potential entrant, or any other
behaviour that can dissuade a new firm from
entering the market.
iv) Profit maximization : a monopoly maximizes profits. Due to the lack of
competition a firm can charge a set price above what would be charged in a
competitive market, thereby maximizing its revenue.

v)Price maker: the monopoly decides the price of the good or product being sold.
The price is set by determining the quantity in order to demand the price desired by
the firm (maximizes revenue).

vi)High barriers to entry: other sellers are unable to enter the market of the
monopoly.

vii) Single seller: in a monopoly one seller produces all of the output for a good or
service. The entire market is served by a single firm. For practical purposes the firm is
the same as the industry.

viii)Price discrimination: in a monopoly the firm can change the price and quantity of
the good or service. In an elastic market the firm will sell a high quantity of the good
if the price is less. If the price is high, the firm will sell a reduced quantity in an elastic
market.
 Under monopoly, high barriers to entry
prevent potential competitor firms from
entering a Profit making industry, and the
monopolist can therefore continue making
economic (supernormal) profits indefinitely in
the long run.
 How does a monopoly
choose price and output?

 Like every other firm, a monopoly

maximises profit at the output when
marginal revenue equals marginal cost
(MR=MC).

 However, the difference is that a monopoly’s

demand curve is the same as the demand
curve for the product (downward sloping).
 Monopoly is a price maker. It does not
face a horizontal demand curve.
 In fact, both its demand curve and
marginal revenue curve are downward-
sloping; and
 the marginal revenue curve is positioned
below its demand curve.
A monopoly’s revenue:
 Because a monopoly, by definition, supplies the entire
market, the demand for goods or services produced by
a monopolist is also the market demand.

 The demand curve for the monopolist’s output

therefore slopes downward, reflecting the law of
demand.

 As seen in the following discussion this has important

implications for revenues.
• Suppose De Beers controls the entire diamond
market and suppose they can sell three diamonds
a day at $7,000 each  total revenue of $21,000

• Total revenue divided by quantity is the average

revenue per diamond which is also $7,000

• Thus, the monopolist’s price equals the average

revenue per diamond
• To sell a fourth diamond, De Beers must lower the
price to $6,750  total revenue for 4 diamonds is
$27,000 and average revenue is again $6,750

• The marginal revenue from selling the fourth

diamond is $6,000  marginal revenue is less than
the price or average revenue

• Recall that these were equal for the perfectly

competitive firm
Monopoly Demand and Marginal and Total
Revenue.
Short-Run Revenues and Costs for the
Monopolist.
 Applying the marginal rule would imply that
the monopolist increases output as long as
selling additional diamonds adds more to total
revenue than to total cost.
 Again profit is maximized at $12,500 when
output is 10 diamonds per day, per unit costs
are $4,000 and the price is $5,250.
Monopoly Costs and Revenue
 Short-Run Losses and the Shutdown
Decision
• A monopolist is not assured of profit
– The demand for the monopolists good or service may not
be great enough to generate economic profit in either the
short run or the long run
• In the short run, the loss-minimizing monopolist
must decide whether to produce or to shut down
– If the price covers average variable cost, the firm will
produce
– If not, the firm will shut down, at least in the short run
 Monopolist’s Supply Curve
• The intersection of a monopolist’s marginal
revenue and marginal cost curve identifies
the profit maximizing quantity, but the price
is found on the demand curve

• Thus, there is no curve that shows both price

and quantity supplied  there is no
monopolist supply curve
 Long-Run Profit Maximization:
• For a monopoly, the distinction between the
long and short run is not as important

• If a monopoly is insulated from competition by

high barriers that block new entry, economic
profit can persist in the long run

• However, short-run profit is no guarantee of

long-run profit
• A monopolist that earns economic profit in the
short-run may find that profit can be increased
in the long run by adjusting the scale of the
firm

• Conversely, a monopoly that suffers a loss in

the short run may be able to eliminate that
loss in the long run by adjusting to a more
efficient size
 Advantages of monopoly

 Monopolies are generally considered to have

several disadvantages (higher price, fewer
incentives to be efficient etc.).
 However, monopolies can also give benefits,
such as – economies of scale, (lower average
costs) and a greater ability to fund research and
development.
 In certain circumstances, the advantages of
monopolies can outweigh their costs.
i) Research and development. Monopolies can make
supernormal profit, which can be used to fund high-cost capital
investment spending.
 Successful research can be used for improved products and lower
costs in the long term. This is important for industries like
telecommunications, aero plane manufacture and
pharmaceuticals.
 Without monopoly power that a patent gives, there may be less
development of medical drugs.
 In developing drugs, there is a high risk of failure; monopoly
profits give a firm greater confidence to take risks and fund
research which may prove futile.
ii)Economies of scale Increased output will lead
to a decrease in average costs of production.
These can be passed on to consumers in the
form of lower prices.

 This is important for industries with high fixed

costs, such as tap water and steel production.
 If a monopoly produces at output Q2, average
costs (P2) are much lower than if a
competitive market had several firms
producing at Q1 (P1).

 This is particularly important for 

natural monopolies –  industries where the
most efficient number of firms is one
iii) International competitiveness. A domestic firm
may have monopoly power in the domestic country
but face effective competition in global markets.
 E.g. British Steel has a domestic monopoly but
faces competition globally.
 With markets increasingly globalised, it may be
necessary for a firm to have a domestic monopoly
in order to be competitive internationally.
4) Monopolies can be successful firms. A firm may
become a monopoly through being efficient and dynamic.
 A monopoly is thus a sign of success, not inefficiency.
For example – Google has gained monopoly power
through being regarded as the best firm for search
engines.

 Apple has a degree of monopoly power through

successful innovation and being regarded as the best
producer of digital goods.
v) Monopoly regulation. One possibility is for a firm to have a
monopoly situation, but the government sets up a regulator
to prevent the excesses of monopoly power.
 For example, utilities like water and gas are natural
monopolies so it makes sense to have one provider.

 The regulator can limit price increases and ensure

standards of service are met.
 In theory this enables the best of both worlds – the
monopoly firm can benefit from economies of scale, but
the consumer is protected from monopoly prices.
– However, it depends on the quality of regulation. There is a
danger of regulatory capture and the regulator allowing the firm
to be too profitable.
vi) Subsidise loss-making services. Another
potential advantage of a monopoly is that they can
use their supernormal profit to subsidise socially
useful but loss-making services.
 For example, a train company can use its
monopoly power to set high prices on peak
services, but this allows the firm to subsidise
unprofitable late-running services on Sat night,
which is useful for people going out for the night.
 vii) Avoid the duplication of services. In some
areas, the most efficient number of firms is one.
 For example, if a city deregulates its bus travel,
then rival bus companies may compete for
profitable peak-hour services.
 This may lead to increased congestion as several
buses turn up at once.
 It is more efficient to have a monopoly and avoid
this inefficient duplication of services.
Examples of industries where monopoly is the best option:

 Electricity distribution. To distribute electricity to every home in a country,

it is most efficient to have a monopoly provider. There are significant
economies of scale in having a comprehensive network. There is no point
in having two electricity cables running up the same street.

 Bus travel in a city. Avoids duplication and enables efficient timetabling.

 Pharmaceutical drug provision. The promise of a patent on a drug is

sufficient to encourage firms to invest in developing new drugs.

 Nuclear power generation. An industry with very high fixed cost and need
to set very high safety standards. It shouldn’t need competition between
different power plants to get best outcome.
 Disadvantages of monopolies

 Monopolies are firms who dominate the

market. Either a pure monopoly with 100%
market share or a firm with monopoly power
(more than 25%) A monopoly tends to set
higher prices than a competitive market
leading to lower consumer surplus.
i) Higher prices than in competitive markets –
Monopolies face inelastic demand and so
can increase prices – giving consumers no
alternative.
 For example, in the 1980s, Microsoft had a
monopoly on PC software and charged a high
price for Microsoft Office.
ii) A decline in consumer surplus. Consumers pay higher prices and
fewer consumers can afford to buy. This also leads to 
allocative inefficiency because the price is greater than marginal
cost.

iii) Monopolies have fewer incentives to be efficient. With no

competition, a monopoly can make profit without much effort,
therefore it can encourage x inefficiency (organisational slack)

iv)Possible diseconomies of scale. A big firm may become inefficient

because it is harder to coordinate and communicate in a big firm.
v) Possible diseconomies of scale. A big firm may become
inefficient because it is harder to coordinate and communicate
in a big firm.

vi) Monopolies often have monopsony power in paying a

lower price to suppliers.
 For example, farmers have complained about the
monopsony power of large supermarkets – which means
they receive a very low price for products.
 A monopoly may also have the power to pay lower wages to
its workers.
vii)Monopolies can gain political power and the
ability to shape society in an undemocratic and
unaccountable way – especially with big IT giants
who have such an influence on society and
people’s choices.
 There is a growing concern over the influence
of Facebook, Google and Twitter because they
influence the diffusion of information in
society.
 Abuse of Monopoly Power

 Monopoly power occurs when a firm has

market dominance in an industry. (for
example, more than 40% market share).
 Abuse of monopoly power could involve
setting higher prices or limiting output.
 Abuse of monopoly power can lead to
deadweight welfare loss, less choice, and
problems for suppliers.
In this diagram, the monopoly raises price from
Pc to Pm – leading to a fall in output from Qc to
Qm.
 on monopoly, markets may be dominated by a single producer
of the good or service, in which case a situation of monopoly
exists, or by a few producers, in which case an oligopoly exists.
In either situation, producers may not be content to take a price
set in the market.
 Having significant control over supply, firms in pursuit of
maximum profits may attempt to make the market price higher
than it would otherwise have been by restricting output.

 The outcome for consumers may therefore be that they are

paying a higher price for a smaller output. This would represent
market failure and a misallocation of society's scarce resources,
as the economy would be deprived of some of the output which
would be valued more highly than that currently being
consumed.
 Also, in a situation of monopoly or oligopoly, profits may not
perform the function that they are supposed to in the 'ideal' free
market situation.
 Here, the making of profit is deemed to be a sign of efficiency;
that is, the goods that are being produced are precisely those
that consumers want and of a suitably high quality, and because
firms cannot influence price, the profit has been achieved by
operating efficiently, with costs being kept below the ruling price.
 However, given the power of firms in monopoly and oligopoly to
restrict output to keep price artificially high, the making of profits
may reflect market power and dominance rather than efficiency.
Monopoly may involve both allocative and technical inefficiency.
 Evidence of Abusing Monopoly Power

 Charging excessively high prices. This might be difficult to

judge, but if they are making high profits then this is an
indication that prices are higher than in a competitive situation
 Predatory Pricing. This involves cutting prices and selling below
average cost to force rivals out of business.
 Limiting production and access to technical developments.
Artificial barriers to fair access.
 Unfair treatment of competitors – e.g. giving preferential
treatment to certain parties, placing others at a disadvantage.
 Price discrimination
 Vertical restraints. This involves the monopoly firm imposing
prices or restrictions on its suppliers or retailers. For example,
this could involve
– Selective distribution e.g. Levis’ doesn’t want to supply Tesco
supermarkets. Also, this is a significant problem in the UK car industry
with car firms entering into selective and exclusive distribution
networks to keep prices high. The competition commission report of
2000 found UK cars were at least 10% higher than European cars
– Exclusive distribution. Some retailers will only buy from some
particular  manufacturers
– Tie in sales. E.g. if you buy a printer the company will try and make
you buy their own brand ink
 A Comparison Of Perfect Competition And
Monopoly Economics .
 Perfect competitive markets are those where there
are large number of small buyers and sellers dealing
with a homogeneous product and a single small firm
do not have influence on the price allocation and acts
as a price taker.

 In a perfectly competitive market the mobility of the

factors of production is perfect in the long run and
both the producers and the consumers have perfect
information regarding the product .
 A competitive firm being the price taker, to achieve the
goal of profit maximisation, it produces a certain level of
output where the price is equal to the marginal cost of
producing an extra unit of product, a ‘Pareto efficient’
output level .
 As the price is also the marginal revenue for a
competitive firm, so the profit is maximised at the
condition where marginal revenue is equal to the
marginal cost.

 This means that for a company to remain in business, it

has to cover its cost, which is to say the price must be at
least greater than the ‘minimum value of the average
variable cost’
 Monopoly

 At the extreme opposite end of the market organisation

is monopoly. Monopoly is a market structure, where a
single firm serves the entire market and is the only
seller of a particular product with no close substitutes .

 Moreover, being the only firm in the market, it does not

take any price but instead it has influence over the
market price and produces a level of output at a
particular price where the firms’ profits are the
highest .
 Monopoly is created when a firm either takes control of
key resources or the government issues a license and
give them exclusive right for the production of goods and
services.

 An economy of scale is another source of monopoly for a

firm, where a single firm has more efficient cost of
production as compared to a large number of firms and
creates a natural monopoly that arises with public
utilities like gas, electricity etc.
 Furthermore, a monopolist will set his/her price higher
than his marginal cost at a point where his/her marginal
revenue is equal to marginal cost, in order to make
positive economic profit .
 However the demand curve is negative for a
monopolist and being a ‘price setter’, it cannot
just randomly set a high price. It would rather
set a price that the market could bear and
maximises its profit.
Comparing Perfect Competition and Monopoly

1.Monopoly and perfect competition represent two

extremes along a continuum of market structures.
 At the one extreme is perfect competition,
representing the ultimate of efficiency achieved
by an industry that has extensive competition and
no market control.
 Monopoly, at the other extreme, represents the
ultimate of inefficiency brought about by the total
lack of competition and extensive market control.
2.A common appealing characteristic of the competitive market is
that ‘Allocative efficiency’ is achieved in this market when price is
equal to marginal cost in both the short and long run of market
equilibrium .

 In competitive markets ‘Pareto Efficient’ output level is achieved

where the consumer’s willingness to pay for an additional unit of
the good is equal to the producers willingness to get paid for an
additional unit of the good.

 Hence, the total economic surplus is achieved, which is equal to

the total consumer surplus and total producer surplus
 Moreover in perfective competition, ‘Productive efficiency’ is
achieved where the product is produced at the minimum average
cost, and the firm charging price equal to marginal cost enables
the consumers to enjoy the lower prices in the competitive firms .

 So, the firms earning normal profit in the competitive firms means
lower price for the consumers and leads to more equality in
society.
 In perfect competition the resources of the economy are used in a
more efficient way, and hence enhance the performance of the
firms’ productivity rewarding consumers with low prices, better
quality and wider choice
 In contrast to the perfect competition, the
common debate against monopoly from the
consumers’ point of view is that monopolist
charges a price higher than marginal cost and the
benefit the producer receives is greater than the
consumers’ welfare, hence resulting in reduction
of the consumer surplus (deadweight loss) and
output produced is less than the socially optimum
level causing allocative inefficiency
 The higher prices by monopolist deprive some
potential consumers from buying the product
and restrain from taking place some common
beneficial trades .
2.To compare monopoly and perfect competition is the
four characteristics of perfect competition: large number
of relatively small firms, identical product, freedom of
entry and exit, and perfect knowledge.

 Number of Firms: Perfect competition is

an industry comprised of a large number of small
firms, each of which is a price taker with no market
control. Monopoly is an industry comprised of a single
firm, which is a price maker with total market control.
 Available Substitutes: Every firm in a perfectly
competitive industry produces exactly the
same product as every other firm. An infinite
number of perfect substitutes are available.

A monopoly firm produces a unique product

that has no close substitutes and is unlike any
other product.
 Resource Mobility: Perfectly competitive firms
have complete freedom to enter the industry
or exit the industry. There are no barriers.

A monopoly firm often achieves monopoly

status because the entry of potential
competitors is prevented. No other firm can
enter the market.
 Information: Each firm in a perfectly
competitive industry possesses the
same information about prices and production
techniques as every other firm.

A monopoly firm, in contrast, often has

information unknown to others.
 The demand curve for a perfectly competitive
firm is perfectly elastic and the demand curve
for a monopoly firm is the market demand,
which is negatively-sloped according to the
law of demand.
A perfectly competitive firm is thus a price taker
and a monopoly is a price maker.
 The monopoly firm charges a higher price and
produces less output than would be achieved
with a perfectly competitive market.

In particular, the monopoly price is not equal to

marginal cost, which means a monopoly does
not efficiently allocate resources.
A comparison of a perfectly competitive
industry with a profit maximising monopolist.
 Key Points
 A monopoly market is characterized by the profit maximizer, price
maker, high barriers to entry, single seller, and price
discrimination.
 Monopoly characteristics include profit maximizer, price maker,
high barriers to entry, single seller, and price discrimination.
 Sources of monopoly power include economies of scale, capital
requirements, technological superiority, no substitute goods,
control of natural resources, legal barriers, and deliberate actions.
 There are a few similarities between a monopoly and competitive
market: the cost functions are the same, both minimize cost and
maximize profit, the shutdown decisions are the same, and both
are assumed to have perfectly competitive market factors.
 Differences between the two market structures
including: marginal revenue and price, product
differentiation, number of competitors, barriers to
entry, elasticity of demand, excess profits, profit
maximization, and the supply curve.

 The most significant distinction is that a monopoly

has a downward sloping demand instead of the
“perceived” perfectly elastic curve of the perfectly
competitive market.
 The criticisms of real-world monopolies based on a
comparison with perfect competition may not be valid for
two reasons.

First, perfect competition is a theoretical ideal . To have

more applicability, monopoly must be compared with the
more relevant models of monopolistic competition and
oligopoly. These are also characterised by productive
and allocative inefficiency. They may also involve a waste of
resources in competitive advertising.
Secondly, is drawn on the assumption that the costs in
monopoly will be the same as in perfect competition.

This ignores the possibility that the monopolist can achieve

internal economies of scale that would reduce unit costs.

It is possible that a monopolist could charge a lower price

than would occur in perfect competition, making
consumers better off , even though the monopolist is
making abnormal profits.
 It is clear that monopolies can operate in ways that lead
to inefficiency or consumer exploitation.

However, one can make a positive case for monopoly.

This explains why the investigation of monopoly practices
is difficult and each case must be judged on its own merits.

It is dangerous to assume that monopoly is always harmful;

the performance of a monopolist may be little different
from that of firms in oligopoly.
 Regulation of monopoly
 The government may wish to regulate 
monopolies to protect the interests of
consumers.
For example, monopolies have the market power
to set prices higher than in competitive markets.

The government can regulate monopolies through

price capping, yardstick competition and
preventing the growth of monopoly power.
Why the Government regulates monopolies.

1.Prevent excess prices. Without government regulation,

monopolies could put prices above the competitive equilibrium.
This would lead to allocative inefficiency and a decline in
consumer welfare.
2.Quality of service. If a firm has a monopoly over the provision of
a particular service, it may have little incentive to offer a good
quality service. Government regulation can ensure the firm meets
minimum standards of service.
3.Monopsony power. A firm with monopoly selling power may
also be in a position to exploit monopsony buying power. For
example, supermarkets may use their dominant market position to
squeeze profit margins of farmers.
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4.Promote competition. In some industries, it is
possible to encourage competition, and therefore
there will be less need for government regulation.
5.Natural Monopolies. Some industries are
natural monopolies – due to high economies of
scale, the most efficient number of firms is one.
Therefore, we cannot encourage competition, and
it is essential to regulate the firm to prevent the
abuse of monopoly power.