Ch20 - Monopoly

• Monopoly

  A pure monopoly exists when just one producer supplies a market
• Monopolies

  • Water industry
  • Rail industry
• Monopoly

  • One business dominates the market
  • Unique product
  • Price-maker
  • Barriers to entry
• Monopoly in India

  • Only one supplier of rail travel in the whole country
• Unique product

  The product supplied by a monopolist will be highly differentiated
• Price-maker


  A dominant business is able to set the price charged in the whole market
• Barriers to entry

  Obstacles that prevent a new entrant from trying to compete
• Barriers to entry

  • Legal barriers
  • Patent
  • Marketing budgets
  • Technology
  • High start-up costs
• Legal barriers


  It is possible to exclude competition legally, e.g. government awarding a contract to a single firm
• Legal barriers

  • Travel
  • Water supply
• Patent

  A licence that prevents firms copying the design of a new product or new piece of technology
• Marketing budgets

  Monopolists often have strong brand names, making it difficult for new entrants to compete
• Monopolist with strong brand name

  • Coca-Cola
• Technology

  If an established and dominant firm has access to complex or up-to-date technology, this can act as a barrier to entry
• High start-up costs

  The cost of setting up a firm to compete with the existing operators is too high
• High start-up costs

  • Rolls-Royce is the only producer of jet engines for aircraft in the UK
• Advantages of monopoly

  • Efficiency
  • Innovation
  • Economies of scale
• Natural monopoly


  A situation that occurs when one firm in an industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms
• Natural monopolies

  • Utilities
  • Rail travel
• Economies of scale

  Monopolists are large and able to exploit economies of scale, resulting in lower average costs and potentially lower prices for consumers
• Disadvantages of monopoly

  • Higher prices
  • Restricted choice
  • Lack of innovation
  • Inefficiency
• Monopolist restricts output

  Prices are forced up
• Monopolist raising prices

  • Some pharmaceutical companies in the US raising prices of medication after securing sole ownership
• If there is just one supplier in a market, consumer choice is restricted
• Monopolists do not have enough incentive to spend money on product innovation if they dominate the market and can prevent or restrict entry
• Monopolists may be inefficient as there is no incentive to keep costs down if they do not face competition