1.2.4 monopolies

Question 1

Monopoly

Answer 1

When there is one dominant firm/seller in a market (more than 25% of market share)

Question 2

Main features of a monopoly

Answer 2

• One business dominates the market
• Unique products
• Price maker
• High barriers to entry
• Legal barriers: firms obtaining patents to legally exclude competition
• Patents: a license that prevents firms from copying the design of a new product/new piece of technology
• Technology: better technology leads to improved efficiency which then lowers average costs
• High start-up costs: the costs of setting up a firm in a certain industry is too high
• Marketing budgets: dominant firms can afford more on advertising to raise brand-name/reputation and put out exclusive deals

Question 3

Advantages of a monopoly

Answer 3

• Better efficiency
• More innovation (more money can be invested in R&D)
• Economies of scale (large firms can exploit EOS to lower average costs)

Question 4

Disadvantages of a monopoly

Answer 4

• Higher prices
• Lack of choice (only one supplier in the market)
• Lack of innovation (due to the lack of competition)
• Inefficiency (no competition leading to less incentives)
• Poor quality of products (no other choices for consumers so the products do not need to be top quality in order to gain more sales)