1. Market structureMarket structure
models:models:
monopolymonopoly

2. Learning outcomes
Understand the meaning of monopoly
Use diagrams to analyse the case against monopoly
Give examples of monop
Explain different causes

3. Definitions
Theoretical monopoly
When a firm has a 100% share of the
market
Theoretical monopoly
When a firm has a 100% share of the
market
Competition Commission
Monopolistic power exists when a firm has a
market share of 25% or more
Competition Commission
Monopolistic power exists when a firm has a
market share of 25% or more
Complex monopoly
When five or fewer firms control 75% or
more of a market and act jointly in a way
which reduces competition
Complex monopoly
When five or fewer firms control 75% or
more of a market and act jointly in a way
which reduces competition

4. Have I got monopoly news for
you …
Commission to break up BAA monopoly
Passengers ‘ ripped off’ by bigbus companies
Company must sell ‘bus war’ rival

5. Task 1Task 1
Investigate one of the news stories on the
previous slide
Bus passengers ‘ripped off’ by big bus
companies
Commission to break up BAA monopoly
Company must sell ‘bus war’ rival
Present your findings to the rest of your table
group in the form of a factsheet

6. Why monopoly power exists
Mergers and
takeovers
Mergers and
takeovers
Entry
barriers
Entry
barriers
Legal monopoly
includes licensing,
franchising and patents
Legal monopoly
includes licensing,
franchising and patents
Anti-competitive
behaviour
includes entry limit pricing,
predatory pricing, collusion
Anti-competitive
behaviour
includes entry limit pricing,
predatory pricing, collusion
Economies of
scale
Economies of
scale

7. Price and output in monopolyPrice and output in monopoly
Price
Output
D=AR
MR
MC
Q
P
AC
C

8. The case against monopolyThe case against monopoly
Price
Output
D=AR
MR
MC
Q
Pm
P*
Q*
Price is higher (Pm)
than it would be in a
competitive market
(P*) where price would
equal to MC.
Output is lower (Qm)
than it would be in a
competitive market
(Q*)
The result is allocative
inefficiency and a loss
of economic welfare
(can you show it?)

9. The case against monopolyThe case against monopoly
Price
Output
D=AR
MR
MC
Q
Pm
C*
Q*
Unit cost is higher (C)
than it would be in a
competitive market
(C*) where only normal
profit would be made
in the long run
The result is
productive inefficiency
AC
C

10. The case against monopolyThe case against monopoly
 Static efficiency losses
 monopolies are a cause of allocative inefficiency since P >
MC, resulting in a lower level of economic welfare
 there is a loss of consumer surplus caused by the high
prices of monopoly markets
 the lack of competition may lead to managerial slack
(rising costs)
 Dynamic efficiency losses
 if barriers to entry are high enough to restrict entry it
may be that monopolies engage in less investment than in
a more competitive market, leading to dynamic as well as
static inefficiencies

11. Case study: airline monopoliesCase study: airline monopolies
 Until February 1994, Aer Lingus monopolised air travel
between Dublin and Scotland (Glasgow), carrying approx
5,700 passengers per month at return fares between £69
to £186
 Ryanair then entered the market by flying to Prestwick,
charging £55 - £75 return
 Analysts doubted that both firms could survive in what was
a sluggish, low growth market
 By February 1995, Ryanair were carrying over 11,000
passengers per month and Aer Lingus 6,400
 Similar effects were witnessed on the Dublin-Manchester
route and London-Dublin route
 A good illustration of how high prices restricted demand
and growth of demand until competition arrived