Table of Contents

### Monopoly Graph

• A monopolist will seek to maximise profits by setting output where MR = MC
• This will be at output Qm and Price Pm.
• Compared to a competitive market, the monopolist increases price and reduces output
• Red area = Supernormal Profit (AR-AC) * Q
• Blue area = Deadweight welfare loss (combined loss of producer and consumer surplus) compared to a competitive market

#### Disadvantages of a Monopoly

• Higher prices Higher price and lower output than under perfect competition. This leads to a decline in consumer surplus and a deadweight welfare loss
• Allocative inefficiency. A monopoly is allocatively inefficient because in monopoly the price is greater than MC. P > MC. In a competitive market, the price would be lower and more consumers would benefit
• Productive inefficiency. A monopoly is productively inefficient because it is not the lowest point on the AC curve.
• X – Inefficiency. It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms. Therefore the AC curve is higher than it should be.
• Supernormal Profit. A monopolist makes supernormal profit Qm * (AR – AC ) leading to an unequal distribution of income.
• Higher prices to suppliers – A monopoly may use its market power and pay lower prices to its suppliers. E.g. Supermarkets have been criticised for paying low prices to farmers.
• Diseconomies of scale – It is possible that if a monopoly gets too big, it may experience diseconomies of scale. – higher average costs because it gets too big
• Worse products. Lack of competition may also lead to improved product innovation.
• Charge higher prices to suppliers. Monopolies may use their supernormal profits and monopsony power to pay lower prices to suppliers. For example, supermarkets squeezing prices paid to farmers.

### Advantages of monopoly

1. Economies of scale

If a firm is in a competitive market and produces at Q2, its average costs will be AC2. A monopoly can increase output to Q1 and benefit from lower long-run average costs (AC1). In industries with high fixed costs, it can be more efficient to have a monopoly than several small firms.

2. Research and development

The supernormal profit can enable more investment in research and development, leading to better products.

3. Good quality firm

A firm may gain monopoly power because it is very innovative and successful, e.g. Google, Amazon, Apple. Therefore, monopoly does not always lead to inefficiency.

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