Sources of Monopoly Power:
How do they form and do we need to worry?
• Monopolies can be created as monopolies or can become
monopolies; how?
• Competition authorities worry about the existence of
monopolies; why?
• Monopolies can be positive or negative for society; explain?
Profits
1
Barriers to Entry (a reminder):
1. High sunk costs – risk of big loss if failure
2. Economies of Scale (maybe even natural monopoly
sized infrastructure?)
3. Limit Pricing – either aggressive tactics or simply
the result of economies of scale
4. Control of Outlets or Suppliers
5. Brand Loyalty (sunk costs to overcome this with
advertising)
6. Patents, Copyrights, Licensing, Gov’t Enforced
Why are these monopolies?
Identify the source of ‘monopoly’ power.
Economies
of Scale –
low price
BAA
Transport for London
Microsoft
Network Rail
ebay
Sky TV
Motorway service station
Thames Water
Brand
loyalty
Economies of Patent /
Scale – big
licence /
infrastructure gov’t
enforced
Other
Monopoly characteristics:
the good and bad
• Price
• Efficiency
• Innovation
• Promotion
Would you predict
these to be HIGH or
LOW?
Monopoly Bad
Monopoly Good
Consumers face higher
prices & less choice
(↓ consumer surplus & ↓
consumer welfare)
Lower income consumers
may be priced into the
market by price
discrimination
Firms may have no
incentive to innovate or
become more efficient
Monopolies be able to take
advantage of big profits to
invest & innovate
New market entrants may
be stifled by monopoly
power, reducing longterm progress
Large firms may be more
internationally competitive
improving exports for the
country