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AS Economics and BusinessHow size affects market power
Unit 2B
By Mrs Hilton for revisionstation
Lesson Objectives
• To be able to discuss:– the Characteristics of monopoly/ monopsony
power– the effects of monopoly power on business and
stakeholders
Starter
• What do you think of when I say monopoly? (show next slide after their suggestions)
Monopoly?
Monopoly?
• Video on China and the Monopoly production of rare earth materials:
• http://www.bbc.co.uk/news/world-asia-pacific-13777439
Monopoly?
• http://news.bbc.co.uk/1/hi/technology/7476556.stm
Definition of Monopoly
• A single supplier in a market
• Is a newspaper seller a monopolist because they are the only place in a village where you can buy a newspaper?
• Is the owner of the local paper a monopolist because its the only local paper available?
Pure monopolist
A pure monopolist is a single seller of a product in a given market or industry. It is actually quite rare for a firm to have a pure monopoly – except when the industry is state owned and has a legally protected monopoly position. The Royal Mail used to have a statutory monopoly on delivering household mail. But this is now changing as the postal service industry is being liberalised (i.e. opened up to fresh competition)
Royal mail BBC article
11
Barriers to Entry• A monopoly is the sole supplier
of a product with no close substitutes
• The most important characteristic of a monopolised market is barriers to entry new firms cannot profitably enter the market
• Barriers to entry are restrictions on the entry of new firms into an industry– Legal restrictions– Economies of scale– Control of an essential resource
Monopoly and Economies of Scale
• Because monopoly producers are often supplying goods and services on a very large scale, they may be better placed to take advantage of economies of scale - leading to a fall in the average total costs of production.
• These reductions in costs will lead to an increase in monopoly profits but some of the gains in productive efficiency might be passed onto consumers in the form of lower prices.
• Economies of scale provide potential gains in economic welfare for both producers and consumers.
Monopoly and Innovation (Research and Development)
• An important issue is what happens to the monopoly profits both in the short run and the long run. Undoubtedly some of the profits will be distributed to shareholders as dividends.
• This raises questions of equity. Some low income consumers might be exploited by the monopolist because of higher prices. Some of their purchasing power might be transferred via dividends to shareholders in the higher income brackets - thus making the overall distribution of income more unequal.
• However some of the supernormal profits might be used to invest in research and development programmes that have the potential to bring dynamic efficiency gains to consumers in the markets.
Monopsonist
Monopsonist
• The only buyer in a market full of sellers
• Examples:– Healthcare system where the government NHS is
the only buyer– Department of defence with military goods– America Wal-Mart for some items
Monopsonist
• Only one employer of significance within a given area http://www.bbc.co.uk/news/uk-england-derbyshire-15879334
– Employer may be able to pay lower wages because employees have no alternatives
– Where graphical immobility is a problem e.g. A village
• Govt intervention to prevent low wages???
Effects of monopoly power on stakeholders
• How might a monopoly affect the following stakeholder groups (discuss):– Government– Suppliers of raw materials to the monopolist– Buyers of the monopolists goods– Employees – Managers– Owners– Media
– Government Deliberate government policies (in the UK and the EU) to open up markets and give new businesses the right to compete (e.g. postal services, car retailing and telecommunications)
– Suppliers of raw materials to the monopolist– Buyers of the monopolists goods – cannot haggle price as only
supplier, but may enjoy lower prices because the monopolist can benefit from economies of scale and get a lower average unit cost
– Employees - no threat of business failing so likely to keep jobs as no other competitor in the market
– Managers– Owners – investors get money back quickly and may enjoy high
dividends due to supernormal profits – Media – cannot harm image or reputation as still only supplier
in the market so customers have to keep going there
Sample question 1
• [4 marks]
Answer question 1
Knowledge: up to 2 marks for defining supplier/licensee (1 mark)and/or identifying a disadvantage of having one supplier e.g. monopoly power (1 mark)Application: 1 mark is available for contextual answersdemonstrating that Panini is licensee/official supplier and provides official merchandise such as stickers (1 mark), there are a range of businesses selling Olympic products ranging from t shirts, key rings and souvenirs (1 mark)Analysis: 1 mark is available for giving areason/cause/consequence of the disadvantage e.g. No competition leads to poor quality merchandise (1 mark), less choice but higher prices due to monopoly power (1 mark), less consumer choice of t-shirts from a very small number of licensed Olympic suppliers (1 mark)
