Monopoly

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WHAT IS MONOPOLY:

Market supplied by just 1 producer

If firm has 25% of market, monopolist

Pure monopolists can be found in water and rail industries - only provider

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FEATURES OF MONOPOLY:

Cost barriers - high costs to set up firm to compete. New competitors often find difficult to match financial commitment

Legal barriers - possible to exclude competition legally E.G. patent - licence that prevents firms copying design of new product/piece of technology for around 20 years

Economies of scale - established firm may dominate market because is grown and can use economies of scale - lower av. costs so cost advantage over new entrant

Marketing barriers - monopolists have strong brand names so new entrants difficult to compete because products unfamiliar/untrusted. Dominant firms spend huge money on advertising. Monopolist may lower prices temporarily if new entrant about to join market - predatory pricing or give exclusive deals - makes harder for new entrant to compete.

Unique product - product supplied by monopolist differentiated - none others exactly like it. E.G. product supplied by pure monopoly only one available so no choice for consumer.

Control over price - monopolists able to control prices they change so price makers - force prices up by restricting quantity supplied.

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THE ADVANTAGES OF MONOPOLY:

More research and development - monopolies are large and profitable so have resources to invest in researched development

Develop new products and technologies to benefit consumers

Economies of scale - av. costs lower

Can supply products at low price

Natural monopolies - markets where more efficient if just 1 firm supplies all consumers E.G. railway operators

Internation competitiveness - if firm has more monopoly in domestic market, can build strength and compete more effectively with competition from overseas

Increases employment and national income in domestic economy

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DISADVANTAGES OF MONOPOLY:

Higher prices - charge more for products and can restrict output to increase price

Restricted choice - if only 1 supplier, choice restricted

If consumers unhappy with quality/prices, can’t switch to another provider

Lack of innovation - monopolists don’t have enough incentive to spend money on product innovation

Consumers forced to buy existing products

If monopolists making higher profits without innovating, may consider resources invested in research and development wasted

Inefficiency - if no competition, no incentive to keep costs low

Monopolists may incur unnecessary costs

If too big, may suffer from diseconomies of scale so av. costs will rise

Some criticised for poor customer services because know that customers can’t switch to another provider