If public utilities are privately owned, as in the UK since privatisation during the 1980s, they usually have their own special regulator to ensure that they do not exploit their monopoly status.Įxamples of regulators include Ofgem, the energy regulator, and Ofcom, the telecoms and media regulator.

Natural monopolies are common in markets for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities.īecause there is the potential to exploit monopoly power, governments tend to nationalise or heavily regulate them.

When MES can only be achieved when one firm has exploited the majority of economies of scale available, then no more firms can enter the market. If MES is only achieved when output is relatively high, it is likely that few firms will be able to compete in the market. Minimum efficient scale (MES) is the lowest level of output at which all scale economies are exploited. With natural monopolies, economies of scale are very significant so that minimum efficient scale is not reached until the firm has become very large in relation to the total size of the market. It may be more efficient to allow only one firm to supply to the market because allowing competition would mean a wasteful duplication of resources. The efficiency loss to society would exist if the new entrant had to duplicate all the fixed factors – that is, the infrastructure. 9b Advertising in Monopolistic Competition dall advertise B $120 A 60 C ATCads 50 ATCno ads dads dno ads 1,000 6,000 2,000Īmerican's Actions Run Safety Ads Don't Run Ads American earns low profit American earns very low profit Run Safety Ads United earns low profit United earns high profit United's Actions American earns high profit American earns medium profit United earns medium profit Don't Run Ads United earns very low profit Fig.In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency. Dollars Bottles of Perfume per Month Fig. or to a lower price in the long run, as in this panel. 9a Advertising in Monopolistic Competition B $120 C 100 ATCads ATCno ads A 60 dads dall advertise dno ads 1,000 6,000 2,000ĥ. 4.Ědvertising can lead to a higherprice in the long run, as in this panel. Dollars 3.ěut in the long run,imitation and entry bring economic profit back to zero. In the short run, the first firms to advertise earn economic profit. 8 A Duopoly Gameġ.Before advertising, long-run economicprofit is zero. Gus’s Actions Confess Don’t Confess Gus’s profit = $25,000 Gus’s profit = –$10,000 Confess Filip’s Profit = $25,000 Filip’s Profit = $75,000 Filip’s Actions Gus’s profit = $75,000 Gus’s profit = $50,000 Don’t Confess Filip’s Profit = $–10,000 Filip’s Profit = $50,000 Fig. 7 A Monopolistically Competitive Firm in the Long Run MC ATC E $40 d1 MR1 MR2 d2 100 250 The typical firm produces where its new MR crosses MC. Dollars Entry continues until P = ATC at the best output level, and economic profit is zero. In the long run, profit attracts entry, which shifts the firm's demand curve leftward. 6 A Monopolistically Competitive Firm in the Short Run MC A $70 ATC d1 30 MR1 250 Kafka's monthly profit–$10,000–is the area of the shaded rectangle. 3.ĚTC at 250 units is less than price, so profit per unit is positive. Kafka services 250 homes per month, where MC and MR intersect. 5c Comparing Monopoly and Perfect Competition (c) Monopoly Price per Unit S = MC F $15 E 10 MR D Quantity of Output 100,000 60,000ĭollars 1. with a higher price and lower market output than under perfect competition. 5a/b Comparing Monopoly and Perfect Competition S MC ATC E $10 $10 d D 1,000 100,000Ĥ. In this competitive market of 100 firms, equilibrium price is $10 Fig. When monopoly takes over, the old market supply curve. and each firm produces 1,000 units, where P = MC. (a) Competitive Market (b) Competitive Firm Price per Unit Dollars per Unit 2. 4 Monopoly Profit and Loss ATC MC ATC MC AVC $50 E E $40 40 32 Total Loss Total Profit D D 10,000 10,000 MR MR (a) (b) Dollars Dollars Number of Subscribers Number of Subscribers Fig. 3 Monopoly Price and Output Determination MC E D 10,000 30,000 MR $60 Monthly Price per Subscriber 40 Number of Subscribers Fig. Monthly Price per Subscriber Number of Subscribers Fig. 1 A Natural Monopoly A 15 B 12 LRATC C 5 DMarket 300 350

Natural monopoly graph