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Chapter 20. Monopoly

A monopoly exists when a single producer dominates the market, often characterized by unique products and significant barriers to entry. Monopolies can lead to advantages such as efficiency and innovation due to their resources, but also result in disadvantages like higher prices and restricted consumer choice. Legal barriers, patents, and high startup costs contribute to the formation and maintenance of monopolies.

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3 views3 pages

Chapter 20. Monopoly

A monopoly exists when a single producer dominates the market, often characterized by unique products and significant barriers to entry. Monopolies can lead to advantages such as efficiency and innovation due to their resources, but also result in disadvantages like higher prices and restricted consumer choice. Legal barriers, patents, and high startup costs contribute to the formation and maintenance of monopolies.

Uploaded by

keaya.aagnavi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Monopoly

Year 10
What is monopoly?
A pure monopoly exists when just one producer supplies to market. However,
there is also legal monopoly. In some countries, if a firm has 25% or more, they are
considered as monopoly.
Features of monopoly
One business dominates the market- a monopoly exists when there is only
one seller in the market. Government may own monopolies for essentials.
Unique product- the product supplied by monopolist may be unique and
highly differentiated. There won’t be rivals supplying the product.
Price maker- although monopolists face downward sloping demand curve,
they are the price makers since only one firm exist in the market. They can
either charge high price and maximize profits or charge low price and
maximize market share.
Barriers to entry- monopolies exist due to no competition. Barriers to entry
refers to restrictions that prevent new firms to enter and compete. Barriers to
entry are high in monopoly market and that’s why only one firm dominates
the market.
The main barriers to entry
❖ Legal barriers- in some markets, competition is excluded legally. Only
one firm can exist according to government laws and regulations. For
example, water supplies, electricity and railway in some countries are
government monopolies.
❖ Patent- a patent is a license that prevents firms copying the design of a
new product or new piece of technology. The new product developer can
be the sole supplier for 20 years, which may help the firm to charge
higher price, earn profits and cover the research and development cost
incurred to develop or innovate the product.

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❖ Marketing budgets- monopolies often have strong brand names. This
makes it difficult for new entrants to compete because their products
could be unfamiliar, and customers may not trust their product.
❖ Monopoly are dominant firms spend huge amount of money on
advertising since they have more finance which cannot be done by new
entrants.
❖ New technology- if an established or dominant firm has access to
technology, it could act as a barrier for other firms. Using technology
may reduce average cost and improve efficiency, therefore lower prices.
New firms may not be able to compete with low prices.
❖ Higher start up costs- in some markets, the cost of setting up a firm to
compete with the existing operators is too high. Therefore, it could act as
a barrier.
The advantages of monopoly
▪ Efficiency- in some markets natural monopolies might exist. These
are markets where it is more efficient if just one firm supplies all
consumers. There may be high fixed cost therefore, firm may be
efficient to survive.
▪ Innovation- since monopolies are often large and make high profits,
they have the resources to invest in research and development. As a
result, they can develop new products and new technologies from
which consumers will benefit.
▪ Economies of scale- since monopolies are large, they can exploit
economies of scale. This means that their average costs are low. As a
result, they may charge lower prices (competitive advantage). This
may benefit consumers and these firms may compete with firms
overseas, therefore, employment and national income of the economy
may increase.

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The disadvantages of monopoly
✓ Higher prices- a firm that dominates the market may charge high price
and restrict supply.
✓ Restricted choice- if there is only supplier in the market, consumers
may have less choice.
✓ Lack of innovation- some monopolies may not be interested to
innovate since they know consumers will any way have to buy the
product from them.
✓ Inefficiency- there are chances for monopolies to be inefficient since
they don’t fear competition. They may experience diseconomies of
scale due to large scale production resulting in high average costs.
They may be inefficient and pass the increased cost to consumers by
charging higher prices.

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