Monopolies

In theory a Monopoly is where there is only one firm in the industry. In reality there are few industries like this. In practice we would call a firm a monopoly if it dominates the market. If it had say a 90% market share we would call this firm a monopoly.

Now read the case study on P148. and answer the questions

Monopolies charge high prices, because they can! They want to make high profits. They can charge high prices because consumers if they want the product have no choice- they can't go elsewhere. Applying theory to this- we can say that the lack of competition/substitues means that Demand is relatively price inelastic. Monopolies can maximise revenue (and most likely profits) by raising prices. Monopolies often restrict supply on purpose to raise the price (remember S and D curves)

Problems of monopoly

• Consumers may pay higher prices due to the lack of competition (monopolies often reduce supply to keep prices high)

• Consumers may have less choice

• Firms may not be very efficient with their resources because there is no need to reduce costs. Equally levels of service may get worse because of complacency due to the lack of competition.

Benefits of monopoly

• The firm should make higher profit. The firm may use these to invest in new products or improve existing products.

• Monopolies due to their size can benefit from economies of scale. If these are very large it may mean that they can pass these lower average costs onto consumers in the form of lower prices. An extreme example of this is a "natural monopoly" such as railways, electricity and water. If you had competition here, it would result in higher average costs and possibly higher prices as each firm would have fewer customers (due to competition) but the same fixed costs of infrastructure. See P 151 "UK water industry" for a good case study of natural monopolies. However, if you allow a natural monopoly to continue, a government might still need to regulate it, to stop it charging a high price to consumers. Typically governments may set a maximum price the firm can charge.