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Explain The Main Sources Of Monopoly Power

426 words - 2 pages

monopoly is a type of market where there is only one firm producing a good or service for that particular market. Pure monopoly is wen there is a sole supplier with no close substitutes, which rarely happens. A more common thing to happen is monopoly power. Monopoly power can even occur in oligopolistic markets: a market with a few dominating firms producing goods or services. Monopoly power is when a firm can behave independently of competition pressures, due to it’s large share in the market. To have monopolistic powers, a firm should own 25% or more of the market it’s in.

One of the main sources of monopoly ...view middle of the document...

Therefore firms with monopoly power have the advantage of limit pricing: lower prices with higher output. They create a price lower than the average total cost (ATC) of potential entrants into the market. Using their better knowledge of the market, they use this mechanism to send signals saying that it’s impossible for other firms to make profits. They do this because if they set price where MC=MR, also known as the profit maximisation point, then it would send huge signals that would attract other firms to enter this market.

The Minimum Efficiency Scale (from now on referred to as the MES) is the lowest point on the long run average cost (LRAC) curve and is the point where a firm would operate to ensure that it is productively efficient. The MES is affected by numerous ways of returning to scale and achieving economies of scale. The MES can affect how many firms can be in a market, thus also being a barrier to entry itself, as certain firms could be benefitting much more from cost advantages than others. If the MES is low and only a small percentage of the market, then many firms have the opportunity to take advantage of economies of scale, e.g. various chains of restaurants. However, in examples of things like natural monopoly, the MES drops due to there being many more variables and outputs, showing that there is little room in the market for more than one firm.

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