Monopoly is a situation in which the market is dominated by one seller or producer. By law a monopoly occurs if a firm has a market share of 25%.
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PROBLEMS OF MONOPOLY
• Consumers may pay higher prices due to the lack of competition
• Consumers may have less choice
• Firms may not be very efficient with their resources because there is no need to reduce costs
• Less innovation (new products)
BENEFITS OF MONOPOLY
• The firm should make higher profits
• The firm may use these to invest in new products or improve existing products.
HOWEVER firms can only increase their prices up to a point ***************
HOW DO FIRMS KEEP THEIR MONOPOLY?
Imagine that Stagecoach has a 95% market share in local area. This means that 95% of buses are operated by Stagecoach. How could they keep this power?
* Cost Barriers
It is expensive for other companies to set up
* Advertising
They may spend lots of money building up a reputation.
* Economies of scale
Larger firms generally have lower costs per unit. They can cut their prices to force out competition
CARTELS
A cartel causes similar problems to a monopoly. 3 or 4 firms may dominate an industry, in this case they could agree to keep the price at a high level in order to each make a healthy profit. They may eventually be investigated and punished by the OFFICE OF FAIR TRADING.
ACTION
a. If you travel from Derby to London you must go by Midland Mainline. What are the possible problems for you?
b. What prevents new firms competing in the chemical industry?
SMART THINKING
c What is meant by barriers to entry in an industry?
d In what ways could a monopoly be (a) more efficient (b) less efficient than several firms competing against each other.
http://tutor2u.net/economics/gcse/revision_notes/firms_monopoly.htm
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