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
- Coca Cola
- BT Sport
- British Telecoms
- Royal Mail
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.
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 costs reductions to consumers by lowering prices.
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.
A monopoly has the knowledge, expertise and finance to innovate successfully.
Disadvantages of Monopolies
Less choice for consumers
A monopoly dominates the market leaving consumers with less choice due to a lack of competition.
A lack of competition with high barriers to entry allows firms to charge high prices to maximise profits.
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
A pure monopoly exists when only one firm exits in the market.
A duopoly exists when two firms dominate the market.