Monopoly Markets (Cambridge International IGCSE Economics)
Exam board Cambridge International · IGCSEUpdated 2024-06-18
Characteristics of Monopoly Markets
Spec point — Characteristics, advantages and disadvantages of monopoly. Note: diagrams are not required.
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A monopoly is a market structure in which there is a single seller
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There are no substitute products
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The firm has complete market power and is able to set prices and control output
- This allows the firm to maximise profit
- There is no long-run erosion of profit levels as competitors are unable to enter the industry
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High barriers to entry exist
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One of the main barriers is the ability of the monopoly to prevent any competition from entering the market
- E.g. By purchasing companies who are a potential threat
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Many governments define a monopoly as any firm having more than 25% market share
- Regulators act to prevent market share increasing beyond this level
- It helps to maintain competition within the market
The Advantages and Disadvantages of Monopoly Power
| Stakeholder | Advantages | Disadvantages |
|---|---|---|
| The Firm | - Large profits generate money for continued investment in technology and product innovation - Market power enables the firm to increase its global competitiveness - Economies of scale can increase thereby lowering the average cost - Price discrimination: **the firm can charge consumers different prices based on the different price elasticity of demand for the product e.g. peak (inelastic) and off-peak (elastic) travel on trains | - Due to a lack of competition, there is a reduced incentive to be efficient - Cross subsidisation can create inefficiencies - Monopolies lead to a** misallocation of resources as they limit supply in order to increase price - Due to a lack of competition, innovation sometimes lacks effectiveness |
| Employees | - Large profits often result in higher wages | - Having only one supplier in the industry limits the opportunity to change employers |
| Consumers | - Product innovation due to the firm's large profits may result in a better-quality product - Cross subsidisation can lower prices on some products that the firm provides - Prices may fall If firms pass on their cost savings to consumers (due to economies of scale) in the form of lower product prices | - A lack of competition is likely to result in higher prices as no substitute goods are available - A lack of competition may result in no product innovation and worse product quality over time - May experience worse customer service as the incentive to improve it is limited - Cross subsidisation is likely to increase prices on some products offered by the firm |
| Suppliers | - Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally | - There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers |
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