Monopoly (Edexcel IGCSE Economics)

Characteristics of Monopoly

• A monopoly is a market structure in which a single seller dominates the market

• There are no substitute products, it is a unique product

• 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

• 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

• 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

• 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