Lecture 9 & 10: Market Structures
Majella Brereton
DCU
2
Today’s Lecture Outline

Market structure
 Monopoly

Book chapter 14
3
Market Failures

Why should governments get involved in
markets?
 Imperfect
market structure
4
4 Market Structures

Imperfect market structure => single firms
have some control over price
 Monopoly
 Duopoly
and Oligopoly
 Monopolistic competition

Perfect market structure
 Perfect
competition
Usually
better for
consumers
and society
5
Monopoly

One firm produces good for which there
are few substitutes

Monopoly is only seller as no one can
enter market to compete

Barriers to entering the industry
6
Barriers to Entry
1.
Granting of patent / copyrights




exclude others from making, using,
selling, importing
Provide an incentive for
research & innovation
Innovation has opportunity cost
If results not patented no one
would undertake research
7
Medical Patents

Soliris (Alexion Pharmaceuticals),
a
drug to treat a rare disorder in which the immune
system destroys red blood cells at night,
 costs $409,500 a year

Alexion spokesman said the high price of
Soliris reflects several factors,
 Including
$800 million investment to develop the drug
 as well as a 15-year investment of time.
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Barriers to Entry
2.
Sole ownership of raw material


Price
E.g. DeBeers diamond company
Over 80% of world’s diamond mines
in 1980s
S
D
Quantity
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Barriers to Entry
3.
Significant economies of scale

The bigger the cheaper
 Start up costs are too large for new firms
4.
Natural monopoly – economies of scale
single firm is most efficient

e.g. Networks – public ownership allows
system wide organisation and planning
10
Vertically Integrated Monopoly

A monopoly across all aspects of the industry
 Owns
all production
 Owns all distribution
 Meets all the demand

E.g. former ESB
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Barrier to Entry
4.
Government Ownership

Natural monopoly / large economies of scale
 Does it make sense?

EU regulations on opening markets to competition
5.
Product Differentiation
6.
Circumstances – location, timing
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Summary Monopoly

One firm produces good for which there
are few substitutes

Monopoly is only seller as no one can
enter market to compete

Barriers to entering the industry
13
Main disadvantages of Monopoly

Monopoly supplier can determine the price

Monopolies can earn ‘supernormal’ profits

No incentive to minimise cost

Tends to have lower output

No choice for customers
14
What can Governments do?

Do Nothing – keep in public ownership

Regulation

Legislation

Remove barriers to entry – privatisation
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Key take away today

Characteristics of monopoly

Main disadvantages of monopoly

Role for government