Monopoly
Monopoly
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Monopoly
A monopoly exists when a firm dominates a market.
A monopoly is defined as a firm with 25% or more market share in a particular industry.
Characteristics of a Monopoly
- One firm dominates the market.
- High barriers to entry and exit.
- Price makers (Downward sloping demand curve).
- Firms are profit maximisers (MC = MR).
Examples of Monopolies
- Microsoft
- Coca Cola
- Walkers
- BT Sport
- Pepsi
- Amazon
- iPhone
- Android
- British Telecoms
- Royal Mail
Monopoly Diagram
A monopoly is a profit maximising firm that produces at MC = MR. A monopoly is able to profit maximise in the short-run and long run due to the high barriers to entry within the industry.
Impacts of Changes in Demand
Figure 2: AR and MR shifting down Figure 3: AR and MR shifting up
Impacts of Changes in Variable Costs
Figure 4: AC and MC shifting down Figure 5: AC and MC shifting up
Impacts of Changes in Fixed Costs
Figure 6: AC shifting down Figure 7: AC shifting up
Benefits of Monopolies
Economies of scale
A monopoly can benefit from economies of scale. This allows the monopoly to become more efficient and earn more profits. In some cases, monopolies will also pass on cost reductions to consumers by lowering prices.
Investment
A monopoly earns enough profits to allow it to reinvest a percentage of its profits to become more efficient.
Research & Development
Large firms are able to spend money on research and development for a long period of time.
Innovation
A monopoly has the knowledge, expertise and finance to innovate successfully. They have the potential to be dynamically efficient.
Disadvantages of Monopolies
Less choice for consumers
A monopoly dominates the market leaving consumers with fewer choices due to a lack of competition.
Higher prices
A lack of competition with high barriers to entry allows firms to charge high prices to maximise profits.
X-inefficient
Due to a lack of competition monopolies can become inefficient. They have no incentive to become efficient as they will still have consumer demand.
Other forms of Monopoly
Pure Monopoly
A pure monopoly exists when only one firm exists in the market.
Duopoly
A duopoly exists when two firms dominate the market.
Barriers to Entry and Exit
Barriers to Entry are factors which prevent new firms from entering a market or an existing firm from expanding into other markets
Barriers to Exit are factors which make it more difficult for a firm to leave a market
Types of Barriers to Entry and Exit
- Limit Pricing – firms set a price below the profit maxisiming level to deter the entry of other firms into the market
- Predatory Pricing – selling a product below the cost of producing it to reduce competition and force rivals out of the market
- Economies of Scale – this barrier to entry exists due to the nature of the business
- Patents – this is type of legal barrier to entry enforced by the Government, for a short term purpose. It restricts entry rather than prevents it
- Brand Loyalty – may discourage competitors from entering the market as they need to spend heavily on marketing and promotion to build a strong relationship with their customers
- Licenses – this acts as legislation allowing firms to operate. Enforcement of licenses restricts access to the market
- Large Redundemcy Payment – barrier to exit because the cost of exiting would be so high that it discourages the firm from leaving the market, even if it’s no longer profitable to stay
Quick Fire Quick – Knowledge Check
1. State the characteristics of a Monopoly (4 marks)
2. Draw a diagram for a Monopoly market structure (4 marks)
3. State at which point Monopolies always produce at in the market (2 marks)
4. Explain four advantages of a Monopoly (8 marks)
5. Explain three disadvantages of a Monopoly (6 marks)
6. Identify two other forms of Monopoly (2 marks)
7. Explain five barriers to entry for a Monopoly (6 marks)
Next Revision Topics:
- Natural Monopoly
- Perfect Competition
- Monopolistic Competition
- Oligopoly
- Contestability
- Barriers to Entry and Exit
A Level Economics Past Papers
