🏰 Monopoly: The Single Seller
Monopoly: A monopoly is a market structure with a single firm that is the sole seller of a product with no close substitutes. The firm IS the industry; it faces the entire market demand curve.
Sources of monopoly power
- Legal barriers — patents (pharmaceuticals), copyrights (media), government licences (broadcasting).
- Economies of scale — huge fixed costs make it impossible for smaller firms to compete (natural monopoly).
- Control of essential resources — e.g. De Beers historically controlled 80%+ of diamond supply.
- Brand loyalty & network effects — strong brands or platforms with network effects (e.g. social media) deter entry.
- Predatory and strategic behaviour — incumbents can deter entry through aggressive pricing, exclusive deals, or excess capacity.
In practice, pure monopolies are rare. The IB uses 'monopoly' loosely to include firms with significant market power (dominant firms). The key feature is that the firm is a price maker — it faces a downward-sloping demand curve.
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🔎 Evaluation: Is Monopoly Always Bad?
Arguments against monopoly
- Higher prices, lower output → consumer surplus falls.
- Deadweight loss → allocative inefficiency.
- No pressure to minimise costs → productive and X-inefficiency.
- Inequality — supernormal profits transferred from consumers to shareholders.
Arguments in favour of monopoly
- Economies of scale — a monopolist may achieve lower ATC than many small firms, potentially passing savings to consumers.
- Dynamic efficiency — supernormal profits fund R&D and innovation (Schumpeter's argument: creative destruction).
- Natural monopoly — industries with huge fixed costs are most efficient with one firm (utilities, rail). Regulate, don't break up.
- Cross-subsidisation — profits from one product/market can fund socially valuable but unprofitable services.
Top-mark exam technique: Don't just list pros and cons. Use 'it depends on' framing: it depends on the size of economies of scale, whether the firm actually innovates, the effectiveness of regulation, and the availability of substitutes.