Entries Tagged 'monopoly' ↓

Monopoly power creates various problems. It is an example of market failure and tends to lead to higher prices, less choice and more inefficiency. see: Problems of Monopolies

1. Liberalisation of Markets. Deregulating markets enables new firms to enter and compete with the existing monopoly. For example, this occurred in telecoms, gas and electricity. However, some industries are natural monopolies and therefore  in these industries it is difficult to encourage new firms. To some extent, the UK government overcame this through increasing access to gas and electricity infrastructure.

2. Merger Policy. This prevents an increase in monopoly power when two firms joining together. Can be useful in preventing monopolies but not dealing with existing monopolies. Continue reading →

Readers Question assess advantages and disadvantages for vertical integration

Vertical integration occurs when two firms at different stages of production merge.

Example of vertical integration.

Brewery merging with chain of pubs

Software supplier merging with Computer firm

Coffer grower merging with coffee retailer such as Nescafe

Advantages of Mergers

See: Advantages of Mergers 

See: disadvantages of mergers 

Vertical mergers will have less economies of scale because most of the production is at different stages of production. There is still scope for monopoly power. Also a vertical merger can lead to monoposony power. e.g. Nescafe have been accused of paying a low price to farmers.

Readers Question: “Merger activity represents a major force for structural change in competitive markets. Examine the principal objectives underlying such strategic developments and consider the degree of success enjoyed by firms in pursuit of those objectives.”

This question is a rather complicated way of saying:

• Discuss Why Firms wish to merge.
• Using Examples, discuss whether firms have  actually benefited from Mergers

Why Firm wish to Merge

1. Increase Market Share. A merger enables a firm to have more market share and therefore it is in a position to set higher prices and make more profit. Increasing market share may be necessary in a declining market with falling profitability.
2. Economies of scale. A merger can enable greater efficiency because the larger firms can share fixed costs. This argument is important for industries with high fixed costs such as car manufacture. It is less important for industries with low economies of scale e.g. cafes.
3. Profit for Research and development. A merger enables a firm to make more investment. This is important for risky investments in industries such as oil exploration. Continue reading →

Readers Question Explain with the help of diagrams the equilibrium of a firm having monopoly power in the market in the short-run and long-run?

The diagram for a monopoly is generally considered to be the same in the short run as well as the long run.

Profit Maximisation occurs where MR=MC. Therefore equilibrium is at at Qm, Pm.

Features of this diagram

• There are barriers to entry in Monopoly. Firms are price makers. The industry demand curve is the same as the firms demand curve.
• Profits are maximised at output where MR=MC. This means they set a price greater than MC which is allocatively inefficient.
• In this diagram the firms makes supernormal profits because AR is greater than AC.

Note: In monopolistic competition the short run equilibrium is different to the long run equilibrium

More on Monopoly

I have question to ask. Its about the monopoly power. The dominance of a monopoly power in the market worries the government and groups that promote consumers interests. However, these companies with monopoly power have argued that they bring benefits to the market. So,what is the benefits from monopoly power brings to the market?

Some of the benefits of monopoly Power.

1. Economies of Scale.

If the firms produces in an industry with very high fixed costs, consumers can benefit from a large firm which can exploit economies of scale. Economies of scale lead to lower average costs and therefore the potential of lower prices. Example:

Would you want several firms providing tap water? Would it make sense to have 2-3 companies laying a network of water pipes and sewage systems across the country? No. It is better to have 1 firm. This is an example of an industry which is a natural monopoly.

Industries like car production and airline production also have significant economies of scale so it makes sense for firms to have some degree of market power.

• However, just because a firm has monopoly power doesn’t mean that the industry necessarily has economies of scale or that lower average costs lead to lower prices.

Continue reading →

An interesting development is Microsoft’s bid to buy Yahoo. This would be one of the biggest mergers, and change the nature of the internet.

It is rather ironic that Google, have filed a complaint on the ground the new firm would have too much market power. It is interesting because it was Microsoft who was once seen as dominating the computer industry. But, it seems increasingly the case that it is Google which is looked upto as the dominating firm in the industry. The reason for the shift is simply that Google are dominating the biggest areas of growth – which is online advertising.

Microsoft has monopoly power in software like Microsoft Word, but, it is expected that people will increasingly choose software that can be downloaded online. Google’s dominance of search engines and online advertising mean that they will be in a position to benefit from this. Continue reading →

Anti trust policy refers to government intervention in markets dominated by monopolies and abuse of monopoly power. In the UK, anti trust policy is better known as simply competition Policy, with the OFT and Competition Commission investigating mergers and abuse of monopoly power.

In the US, antitrust become important in the late nineteenth century, when American industry and become dominated by a few very powerful firms – in particular Rockefeller and J.P. Morgan trust’s. In 1890, the US anti trust board successfully broke up some of the big Railroad firms, Du Point chemicals and Rockefeller corp. This became known as the Sherman Antitrust act of 1890 and dominated American antitrust policy in the twentieth centuries. Continue reading →

(b)readers Question: A monopolist operates under a production technology which allows the production of any output level at a constant average cost of $5 per unit. This monopolist sells into two distinct markets the demand curves for which are:Q1 = 55 – P1 (for market one) and Q2 = 70 – 2P2 (for market 2).If this monopolist operates so as to maximize total profit then calculate:

(i) Total output;
(ii) The quantity sold in each market;
(iii) The price charged in each market;
(iv) The monopolist’s total profit.

Continue reading →

Readers Question: describes how markets for electronic goods and software are sometimes dominated by
a single type of product, which incorporates the technology developed and controlled by one of the firms in the market. Do you agree that this reduces competition and is bad for consumers and producers? Justify your answer. (15)  AQA unit 1

A difficult question for AS level

The firm with the patent can charge monopoly prices for using the technology. Therefore, this leads to higher prices for consumers and less competition, because new firms may not be able to afford the rights to use the technology.

However, the fact that many companies are in the market suggests the market is competitive. For example, there are several firms selling computers based on the micro chip.

The common technology may be a small % of total costs. e.g. microchip may only be 5% of the total cost. Therefore, even if one firm has monopoly power in selling micro chips (intel) it doesn’t affect prices and competition too much.
Continue reading →