Monopoly: A market structure in which there is only one producer/seller

Introduction to Monopoly

Characteristics of a Monopoly

Assumptions of Monopoly

  • One firm in the industry: Only one firm exists within the industry so there is no distinction between the firm and industry.This firm supplies the output of the entire industry.
  • Controls price or output: A firm can control either price or output, but not both. If it sets the price the output produced will be determined by consumers. If it sets the output the price will be determined by the market.
  • Profit maximisation: It is possible for the firm to earn SNP’s in both the short run and long run. A firm aims to make maximum profits and it achieves this where MC = MR
  • Barriers to entry: If a monopoly market structure is to exist in the long run there cannot be freedom of entry into the industry. These barriers prevent the entry of new firms into the industry, which would threaten the position of the monopolist.

Barriers to Entry 

1. Legal / Statutory Monopoly: Other firms may not be allowed into the industry because the government gives a firm the sole right to supply a particular good or service

2. Ownership of a patent / copyright: If a firm has the sole right to a manufacturing process then no other firm can compete with it. Other firms are not allowed to use this patent until the time period for it has expired.

3. Large capital investment: In some industries the minimum size of a firm required to operate efficiently is so large that there is no room for competitors once one firm has established itself. Competitors are discouraged from entering because of the high initial start-up costs.

4. Mergers / takeovers: A firm may ensure its survival by taking over other rival firms in the same line of business, such that it becomes a monopolist and no competition exists within the industry.

5. Monopolies based on fear, force or threats: An individual / firm may stop other individuals/firms providing similar goods/services by
means of instilling fear into potential entrants.

6. Brand proliferation: A firm may gain monopoly power if, through its advertising, consumers are convinced
that there is no suitable alternative to its particular brands.

Advantages of Monopolies

  1. Economies of Scale: Cost advantages that a business obtains due to expansion
  2. Guarantee supply of Product / Service: Monopolies ensure the provision of services. E.g. Utilies(ESB)
  3. Employment: Iarnród Éireann employs approx. 4,000 employees
  4. Reduced use of scarce resources. If two companies were to vy for scarce resources, duplication of resources would occur. Monopolies eliminate this inefficiency.
  5. Potential for Innovation / R & D: The SNP’s that are earned by monopolies can be re-invested into R&D, which will lead to consumers getting better products.

Antitrust of Monopolies

When did the US government begin to concern itself with monopolies?

The Microsoft Antitrust Case

Regulation of Monopolies

Test your knowledge of Monopoly