Monopoly Markets

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Characteristics of Monopoly Markets

A monopoly is a market structure in which there is a single seller
There are no substitute products
The firm has complete market power and is able to set prices and control output
- This allows the firm to maximise profit
- There is no long-run erosion of profit levels as competitors are unable to enter the industry
High barriers to entry exist
- One of the main barriers is the ability of the monopoly to prevent any competition from entering the market
  - E.g. By purchasing companies who are a potential threat

Many governments define a monopoly as any firm having more than 25% market share
- Regulators act to prevent market share increasing beyond this level
- It helps to maintain competition within the market

The Advantages and Disadvantages of Monopoly Power

Stakeholder	Advantages	Disadvantages
The Firm	Large profits generate money for continued investment in technology and product innovation Market power enables the firm to increase its global competitiveness Economies of scale can increase thereby lowering the average cost Price discrimination: the firm can charge consumers different prices based on the different price elasticity of demand for the product e.g. peak (inelastic) and off-peak (elastic) travel on trains	Due to a lack of competition, there is a reduced incentive to be efficient Cross subsidisation can create inefficiencies Monopolies lead to a misallocation of resources as they limit supply in order to increase price Due to a lack of competition, innovation sometimes lacks effectiveness
Employees	Large profits often result in higher wages	Having only one supplier in the industry limits the opportunity to change employers
Consumers	Product innovation due to the firm's large profits may result in a better-quality product Cross subsidisation can lower prices on some products that the firm provides Prices may fall If firms pass on their cost savings to consumers (due to economies of scale) in the form of lower product prices	A lack of competition is likely to result in higher prices as no substitute goods are available A lack of competition may result in no product innovation and worse product quality over time May experience worse customer service as the incentive to improve it is limited Cross subsidisation is likely to increase prices on some products offered by the firm
Suppliers	Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally	There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers

Characteristics of Monopoly Markets

Characteristics of Monopoly Markets

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