<2.11.3 MONOPOLY POWER>

• If a firm's output constitutes a LARGE PORTION OF THE TOTAL (e,g Oil output from OPEC) then by reducing/increasing SUPPLY they CAN DIRECTLY IMPACT THE MARKET PRICE, hence they would have market power.

• In cases when one firm supplies the entire market, we can say that THE FIRM'S SUPPLY CURVE, is ALSO THE INDUSTRY SUPPLY CURVE.

• In the case of ADIDAS, the HAWKERS STALL, and the MTR they were able to DIFFERENTIATE themselves from their rivals, by offering slightly/greatly different styles and varieties and therefore produced HETEROGENOUS products, which gave them some PRICE SETTING ABILITY. 

• In the case of a MONOPOLY, not only are the goods differentiated but they usually have LITTLE TO NO CLOSE SUBSTITUTES, 

• If they can be considered NECESSITIES, then they can achieve INELASTIC DEMAND over a large price range giving them firm tremendous market power.

• We learned for the PC model, that low barriers to entry, eventually mean new entrants will enter the market and increase the supply and lower individual firm's demand, resulting in lower prices and profits, however, in the monopoly model THE FIRM ENJOYS A LARGE AMOUNT OF PROTECTION PREVENTING POTENTIAL COMPETITORS FROM ENTERING THE MARKET due to EXTREMELY HIGH BARRIERS TO ENTRY which allows it to manipulate the price it charges without the risk of losing its customers to rivals.

• ECONOMIES OF SCALE refer to AVERAGE COST REDUCTIONS THAT OCCUR WHEN A FIRM INCREASES ITS SCALE OF PRODUCTION. These act as a barrier to entry for any new entrants who will likely face much higher average costs. In addition, the established firm can lower its price so much that it forces the smaller firm into a situation where it will not be able to cover its costs. This means firms must enter the market on an equally large scale, which is highly unlikely as it would not only involve huge start-up costs but also involve a high degree of risk and uncertainty. 

BRANDING involves the creation by a firm of a UNIQUE IMAGE & NAME of a product. It works through ADVERTISING campaigns that try to influence consumer tastes in favour of the product, attempting to ESTABLISH CUSTOMER 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. Examples of branding include brand-name items (such as NIKE®, Adidas®, CocaCola®, etc.)

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 microprocessor chips used by IBM computers.

LICENSES 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 & OTHER TRADE RESTRICTIONS limit the quantities of a good that can be imported into a country, thus reducing competition.

PAPER 1 10-MARKERS

• Explain two possible government responses to the abuse of monopoly power. 

• Explain why monopoly power may be considered a type of market failure

• Explain how welfare loss might result from monopoly power.

PAPER 1 15-MARKERS

• Discuss the view that barriers to entry in a monopoly will always lead to abnormal profits in the long run.

• Evaluate the view that monopoly is undesirable as it fails to achieve productive and allocative efficiency

• Evaluate the view that monopolies, despite their inefficiencies, may often be considered desirable. 

• Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly power.

• Discuss the view that governments should always try to prevent a monopoly from occurring in a market.

• Discuss the view that legislation is the best way of dealing with the problem of monopoly power.