Monopoly (Edexcel IGCSE Economics)
Characteristics of Monopoly
Spec point —
1.2.4f
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A monopoly is a market structure in which a single seller dominates the market
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There are no substitute products, it is a unique product
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The firm has complete market power and is a price-maker
- This allows the firm to generate high profits
- 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 and have the ability to prevent/deter competition from entering the market
- Legal barriers such as a licence to sell the product will limit competitors entering the market
- Patents prevent other firms from copying the design of a product
- Generous marketing budgets on branding and advertising increase customer loyalty
- High start-up costs, e.g. setting up a renewable energy company costs billions
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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
- This helps to maintain competition within the market
Evaluation of Monopoly
Spec point —
1.2.4g
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A lack of competition is likely to result in higher prices as no/few substitute goods are available
- A lack of competition may result in no product innovation and worsening product quality over time
- Customer service may be poor as the incentive to improve it is limited
Advantages and Disadvantages of a Monopoly
| Advantages | Disadvantages |
|---|---|
| - Economies of scale **can be achieved thereby lowering the average cost - Possibly lower prices if firms pass on their cost savings (due to economies of scale) to consumers - Product innovation may be possible due to the firm's large profits may result in a better quality products | - Due to a lack of competition, there is a reduced incentive to be cost efficient - May lead to an** inefficient allocation of resources as they limit supply in order to increase price - Consumers will have limited choice - A lack of competition is likely to result in higher prices as no substitute goods are available - There is a risk of diseconomies of scale occurring - A lack of competition may result in no product innovation and poor product quality over time - May experience worse customer service as the incentive to improve it is limited |
Exam Hint When evaluating monopolies, demonstrate critical thinking by acknowledging the positives as well as the negatives. For example, Amazon has partly become a monopoly by being very good at what they do and consumers benefit from lower prices and greater choice. However, this power means that they can also abuse the suppliers on their platform.
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