Parent’s evening

appointments

For tonight!
Monopolies
& Market Structure
Market Structure
 Market structure – identifies how a market is made
up in terms of:
 The number of firms in the industry
 The nature of the product produced
 The degree of power each firm has
 The degree to which the firm can influence price
 Profit levels
 Firms’ behaviour – pricing strategies, non-price competition,
output levels
 The extent of barriers to entry
 The impact on efficiency
 Market Structure
Perfect Pure
Competition Monopoly

More competitive (fewer imperfections)

 Market Structure
Perfect Pure
Competition Monopoly

Less competitive (greater degree of

imperfection)
 Market Structure

Perfect Pure
Competition Monopoly

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degree of

monopoly power exercised by the firm.
Market Structure
Importance:
 Degree of competition affects the

consumer – will it benefit the

consumer or not?
 Impacts on the performance and

behaviour of the company/companies

involved
Market Structure
 Models – a word of warning!
 Market structure deals with a number of economic
‘models’
 These models are a representation of reality to
help us to understand what may be happening in
real life
 There are extremes to the model that are unlikely
to occur in reality
 They still have value as they enable us to draw
comparisons and contrasts with what is observed
in reality
 Models help therefore in analysing and evaluating
– they offer a benchmark
 So now can you
predict a monopoly’s
characteristics
Market Structure
 Characteristics of each model: One
 Number and size of firms that make – exceeds
up the
industry 25% market share
Price maker
 Control over price or output
 Freedom of entry and exit from the industry Difficult
 Nature of the product – degree of homogeneity
(similarity) of the products in the industry (extent
to which products can be regarded asPrice inelastic
substitutes
for each other) Few substitutes
 Diagrammatic representation – the shape of the
demand curve, etc.
Monopoly….
 Pure Monopoly assumptions
 Single seller of
good/service

 No substitutes for
the good

 There are barriers to

entry into the
market
 Need to know
this
Monopoly
 Pure monopoly – where only one producer
exists in the industry. In reality, rarely exists
– always some form of substitute available!
 Monopoly exists therefore where one firm
dominates the market
 Firms may be investigated for examples of
monopoly power when market share
exceeds 25%
 Use term ‘monopoly power’ with care!
Can you remember the industry’s
on a monopoly board?
 Trains
Which of these
 Water
industries do you
 Electricity
think are
 Taxman
 Bank
MONOPOLIES?
 Jail
 Car Parking
 Need to know
this
Monopoly power
 Monopoly power – refers to cases where firms
influence the market in some way through their
behaviour – determined by the degree of
concentration in the industry
 Influencing prices
 Influencing output
 Erecting barriers to entry
 Pricing strategies to prevent or stifle competition
 May not pursue profit maximisation – encourages
unwanted entrants to the market
 Sometimes seen as a case of market failure
 Vita
l revi
Monopoly si o n

 Origins of monopoly:
 Natural monopoly – usually on a network or grid…

wasteful to duplicate!
 Geographical factors – where a country or climate is

the only source of supply of a raw material…quite

rare. However, consider a single grocery store in a
isolated village…
 Government created monopolies – now sold off!

 Through growth of the firm

 Through amalgamation, merger or takeover

 Through acquiring patent or license

 Through legal means – Royal charter, nationalisation,

wholly owned plc

Identify the source of
‘monopoly’ power.
 Identify the source of
‘monopoly’ power.
Natural Geographical Govt Co growth – Patent / Other
created EoS licence
mergers etc
London Underground

O2 – iphone

BAA

Royal Mail

Microsoft

Bank of England

i-phone
i-tunes
De beers diamonds

Motorway service station

Thames Water
 Identify the source of
‘monopoly’ power.
Natural Geographical Govt Co growth – Patent / Other
created EoS or licence
mergers etc
London Underground 
O2 – iphone  
BAA 
Royal Mail 
Microsoft 
Bank of England 
i-phone  
i-tunes
De beers diamonds  
Motorway service station 
Thames Water 
A natural monopoly?
 Why does it make no sense to have a
2nd channel tunnel?

 Despite being a natural monopoly, what

competition does the firm face?
Label one side

 HIGH

The other

 LOW
Monopoly characteristics
 Price

 Efficiency
Would you
predict
Innovation
these to be


 Collusion HIGH or
 Promotion
LOW?
 Diagrams next lesson

Monopoly characteristics
 Price – could be deemed too high, may be set to destroy
competition (destroyer or predatory pricing), price
discrimination possible.
 Efficiency – could be inefficient due to lack of
competition (X- inefficiency) or…
 could be higher due to availability of high profits

 Innovation - could be high because of the promise of

high profits, Possibly encourages high investment in
research and development (R&D). Could be low as there is
no incentive to reduce costs.
 Collusion – possible to maintain monopoly power of key
firms in industry
 High levels of branding, advertising and non-price
competition
Homework
 Create a mindmap / poster / revision notes to
help you remember the key causes of a monopoly.

 This must include:

 Natural monopoly Need to
include
 Geographical
written
 Economies of scale / growth
explanation &
 Govt created business
 Company merger/takeovers examples
 Patent / licence
BAA break up of monopoly

Further reading