A monopoly is a single seller protected by barriers to entry; it can charge higher prices but may fund research.
A monopoly is a market with a single seller. There are no close substitutes for its product, and barriers to entry stop new firms joining.
Barriers to entry include legal rights such as patents and licences. Others are huge economies of scale that new firms cannot match, and control of a key resource. In practice, a firm with a very large market share can act like a monopoly.
Effects of one firm. Price: it can restrict supply and charge higher prices. Choice: consumers have only one seller. Quality: without rivals, it may have little pressure to improve. Profit: barriers protect high profits in the long run.
Advantages: large economies of scale can mean lower costs. High profits can fund research into new products, which is why patents give inventors a temporary monopoly. Some monopolies, such as water supply, avoid wasteful duplication of pipes. Diagrams are not required here.
- Monopoly
- Single seller, no close substitutes, barriers to entry.
- Barriers to entry
- Patents and licences, economies of scale, control of resources.
- Effects
- Higher price, less choice, possible complacency, high profit; may fund research.
Worked example: A medicine patent
A drug company invents a new medicine and receives a 20-year patent.
- Barrier: the patent is a legal barrier, so no rival can copy the drug.
- Price: the company can charge a high price, since patients have no substitute.
- Advantage: the profit rewards years of costly research and funds future medicines.
- Disadvantage: some patients and health systems struggle to afford the drug until the patent ends.
Watch out for this
A monopoly can charge any price it likes and still sell the same amount.
A monopoly still faces the demand curve. If it raises the price, quantity demanded falls. It chooses a high price but sells less.
Check your understanding
Which is an advantage that a monopoly may bring to consumers?
- Profits may fund research into new and better products.
- It faces strong pressure from rivals to cut prices.
- Consumers have more choice of sellers.