Market Structures – part 3

Ways to control a monopoly:

 Nationalization – government buying the monopoly from the private sector,
so that it (the government) can choose prices and output levels that benefit
society.
 Legislation (laws) and regulations (rules) and taxes – all designed to restrict
how much the monopoly can grow or how much it can exploit consumers.
 Price ceilings (maximum price) – designed to limit the high prices that a
monopoly can charge.

Advantages and disadvantages of each market structure

Advantages Disadvantages
Perfect  Efficiency  No economies of
Competition  Lower prices scale
 Consumer sovereignty  No abnormal profits
 No money spent on in the long run
advertising because  No research &
there is perfect development
knowledge. (because there aren’t
 No firm has monopoly enough profits to pay
power for it)

Monopolistic  Greater consumer  No efficiency

Competition choice (variety of
goods and services to
choose from)
 There is innovation, as
firms compete with
each other to make
better products
 No firm has monopoly
power
 Advertising gives
consumers more
 Money is spent on
advertising, thus cost
of production
increases
 There might be
wastage e.g. too
much packaging for a
simple product
 No abnormal profits
in the long run
 No research &
 knowledge about development
products (because there aren’t
profits to pay for
them)
 Advertising can be
misleading
Oligopoly  Economies of scale  No efficiency
 They can afford to pay  They can collude and
for research & form cartels which
development have monopoly
 Abnormal profits in power
both the short run  Less variety for
and long run consumers
 Prices can be stable  Higher prices
since the firms won’t because there is less
easily deviate from competition
what is already being
charged (the price at
the bend or kink)
 More tax revenue for
the government
Monopoly  Economies of scale  Exploitation of
 They can pay for consumers by
research & charging higher
development prices and producing
 They can pay for new less output
technology  Customer service
 Abnormal profits in might not be the best
both the short run  Quality of the
and long run product might not be
 More tax revenue for the best
the government  Price discrimination
(charging different
prices to different
consumers)
 Unfair trade practices
to block other firms
 from entering the
market (such as
predatory pricing).
 Inequality of wealth,
since the monopolist
gets wealthier at the
expense of
customers
 No efficiency
 Potential for
diseconomies of
scale if it expands too
much
 Less motivation to be
innovative
 No choice/variety for
consumers
 Monopolies might
gain political
influence