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Monopoly

Monopoly: One dominant seller in a market.

A pure monopoly is where just one firm supplies the whole market, e.g. a single company supplying water to a region. Pure monopolies are rare. A firm can also be treated as a monopoly when it dominates the market even though some rivals exist. In some countries, a firm with 25% or more of a market counts as a monopoly in law.

Main features of monopoly

• One business dominates the market: it supplies all or most of the market, e.g. a search engine with around 80% of all searches in a country.
• Unique product: there is no other product exactly like it, so consumers have no real alternative.
• Price-maker: the monopolist can control the price, e.g. by restricting supply to push the price up. However, it cannot set both the price and the amount sold, as selling more would force the price down.
• Barriers to entry: obstacles stop new firms from entering the market and competing.

Price maker: where a dominant business is able to set the price charged in the whole market.

Barriers to entry

Barriers to entry: obstacles that might discourage a firm from entering a market.

Patent: licence that grants permission to operate as a sole producer of a newly designed product.

The five main barriers to entry:

• Legal barriers: the government may give one firm the sole right to provide a service, e.g. running trains on a route or supplying water to a district, often for 10 to 30 years. Competition is then against the law.
• Patents: other firms cannot copy a new product for up to 20 years, so the inventor can be the only supplier and charge a higher price to recover its research and development (R&D) costs. Patents are common for new medicines.
• Marketing budgets: dominant firms spend huge sums on advertising to build strong brand names. New firms’ products are unfamiliar and less trusted, and they cannot match this spending.
• Technology: if the dominant firm has advanced technology that cuts its costs, rivals that cannot copy or buy it may be forced out.
• High start-up costs: in some industries, setting up a rival firm would cost hundreds of millions, e.g. making jet engines for aircraft.

Advantages and disadvantages of monopoly

Advantages of monopoly:

• Efficiency: in a natural monopoly, such as water supply or rail travel, it is cheaper for one firm to supply everyone. Two firms building their own water pipes or railway lines would waste resources.
• Economies of scale: most monopolies are large, so their average costs are low. If they pass the savings on, consumers pay lower prices. A strong home monopoly may also compete better against foreign firms, helping jobs and national income.
• Innovation: as a price-maker, a monopoly can make high profits, which it can spend on R&D to develop new products and technology.
• Quality: lower costs and spending on R&D can allow a monopoly to offer a high-quality product or service.

Disadvantages of monopoly:

• Price: a monopoly can restrict output to force prices up, so consumers pay more.
• Choice: with only one supplier, consumers cannot switch when they dislike the price, quality or service.
• Innovation: if consumers have to buy its existing products anyway, a monopoly may see little reason to develop new ones.
• Efficiency: with no rivals, there is little pressure to keep costs down, so a monopoly may waste resources. If it grows too large, it may also suffer diseconomies of scale.
• Quality: a monopoly may offer poor customer service, e.g. too few call centre staff, because its customers have nowhere else to go.