The Benefits & Drawbacks of Monopoly5.3.3

Learning Outcomes To understand the meaning of the term

‘monopoly’. To appreciate what is meant by

monopoly power and how this can influence a firm’s behaviour.

To understand the main disadvantages and advantages of a firm having monopoly power.

Starter What could be a disadvantage of

business growth? Hint – include keyword and then offer

examples

What is a MonopolyA business is considered to be in a monopoly position when it has some degree of control over the market in which it operates. There are no rivals. A monopolist can be greedy and charge an unfairly high

price. If it is an essential service, such a energy supply, they

could charge virtually anything. A monopolist could also offer sub-quality products &

services as there is no fear that the customers can switch to a competitor.

Strength of competition is key to a monopoly. Little credible competition means monopolists can act as they please. If a new company attempts to enter the market a monopolist might cut prices to put the newcomer out of business before returning prices to ‘normal’.

Monopolies & StakeholdersMonopolies that charge high prices and/or provide poor service is obviously damaging to customers. BAA used to own the 3 major airports in London and were often accused of offering poor service for passengers so the government forced BAA to sell Gatwick Airport in 2009. The new owners of Gatwick immediately announced measures to cut queues to win customers from Heathrow. Some of the drawbacks of monopolies are:- Businesses with market power often put the squeeze on

their suppliers, i.e Tesco. Monopolists are often slow to respond to market changes.

For example, a monopolist would have no interest in developing high speed broadband for customers.

Shareholders often want this behaviour to continue as it means higher profits for them to share.

Monopolies Task 1 Research a recent example where the government

have intervened because of a potential monopoly. Then explain:- What the Government did What action did the business have to take What impact did it have on the business (think

stakeholders, i.e Staff & Shareholders) What potential impact would it have on the customer Hint – if you can’t find a monopoly look at the case of

MyFerryLink & Eurotunnel

Are monopolies always bad? Just because a business is in a monopoly situation doesn’t mean it

automatically charges high prices for inferior products. The Government often puts things in place to ensure this doesn’t happen.

There are occasions when a natural monopoly occurs, such as when building & maintaining expensive infrastructure. There would be no point in two companies building rail lines between Birmingham & London. Each business would be unlikely to get enough customers to cover costs.

There are occasions of public safety, would you want two companies competing to build the cheapest nuclear power plant?!

Sky were forced to share the rights to Premier League football. The thought was that it would build competition and be better for the customer. However, many customers faced the prospect of having two subscriptions if they wanted to continue to see all the games.

ConclusionMonopolies can occur even when there are a number of companies in the market. In this case the companies all work together and basically act as a larger company to fix prices or restrict supply to drive prices up. This is known as collusion.

Revision Essentials Collusion– where firms act together to

effectively become a monopoly. Monopoly – where a single supplier

dominates the sales in a market and therefore has a degree of control over it.

Natural monopoly – where market conditions mean that it is in everyone’s best interest for a business to be in a monopoly position.

Exercise Pg 82