This section of the Cambridge IGCSE (0455) Economics syllabus requires students to understand the characteristics, advantages, and disadvantages of monopoly.

Note: market structure diagrams of monopoly are not required for assessment purposes.

There is no universally accepted definition of a monopoly, and the legal definition can vary from country to country. However, in its most simplistic state, monopoly describes a market structure in which there is one supplier of a good or service. In this case, a pure monopoly is said to exist as one single firm supplies the whole market. This means that the firm is the industry.

In general, a firm is classified as a monopoly if a single producer or supplier dominates the market with its significant market share (and hence market power). Hence, market leaders (those with the highest market share in a particular industry) have some degree of monopoly power.

In the real world, there are market leaders in almost all industries. They may have sufficient monopoly power to influence the market supply and hence prices. Examples of firms with very high market share in their respective industries include the following, which could be classified as firms with a high degree of monopoly power.

Case Study - Airbus and Boeing duopoly

For many decades, Boeing and Airbus have dominated the aeroplane manufacturing industry. According to the Michigan Journal of Economics, Boeing maintains approximately 40% market share, while Airbus dominates with the other 60% of the industry. The Chinese state-owned Commercial Aircraft Corporation of China (COMAC) is attempting to enter the aeroplane manufacturing market, which could challenge this long-standing duopoly.

The key characteristics of firms operating in highly monopoly markets are outlined below. These interrelated characteristics, or features, have a direct impact on price, quality, choice, and profit. These characteristics include:

• There is a single supplier. The lack of any close substitute products in a monopoly market means that the firm enjoys being the only one in the industry.
• There are significant barriers to entry into the market (see Box 1). These are obstacles that prevent new firms from entering and competing in the market.
• The lack of competition and nature of high barriers to entry enable the monopoly to earn supernormal profit (or economic profit). This refers to profit over and above the amount needed as a financial incentive to keep the firm in the industry in the long run).
• The monopolist is a price maker. With significant market power, a monopolist controls all or enough of the market supply to be able to set its own prices and charge consumers higher prices than if the market was highly competitive.
• The existence of imperfect knowledge in the market means that a monopolist is able to protect its market power. This is because consumers and potential competitors do not have perfect or impartial knowledge about the product and market, reinforced by the monopolist’s ability to protect its intellectual property rights (see Box 2), such as copyrights, trademarks, and patents.

Box 1 - Barriers to entry

Examples of entry barriers include the following.

• Access to distribution channels
• Advertising and marketing budgets
• Brand loyalty (customer loyalty)
• Copyrights on works of art
• Economies of scale of the existing monopoly
• Exclusive contracts
• Legal barriers, such as licensing

• Ownership of essential factors of production
• Patents on innovations and production processes
• Predatory pricing (such as price wars)
• Product differentiation strategies
• Registered trademarks
• Start-up (set-up) costs
• Switching costs for consumers

Box 2 - Intellectual property rights (IPRs)

Patents are the official rights given to a business to exploit an invention or process for commercial purposes. They give a registered patent holder the exclusive right to use the innovation for a limited time period. Having a patent creates incentives to invest in research and development; otherwise rivals could simply just copy the innovations. Patents, as an intangible asset, add value to the business, especially as they can gain from having a competitive advantage for the duration of the patent.

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Copyrights give the registered owner the legal rights to creative pieces of work. Copyrights cover the work of authors, musicians, conductors, playwrights (scriptwriters) and directors. It give the copyright holder of the intellectual property the exclusive rights to the commercial use of the product. Copyrights enable the owner to prevent competitors from using their published works. The contents of this website is copyrighted to the author and InThinking.

InThinking is a registered trademark that is protected by intellectual property legislation

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Trademarks are a form of intellectual property. They give the listed owner the legal and exclusive commercial use of the registered brands, logos, and/or slogans (catchphrases). Each year, Interbrand compiles a list of brand values. The top 10 are listed below.

World's most value brands by brand value (2024)

Source: Statista

Economic profit can be used to fund research and development (R&D)

Recall that a monopoly is a market structure where a single firm dominates the market. This means the monopolist has significant market power. The advantages of monopoly include the following points:

• The size of a monopolist and the scale of its operations means that the firm can maximise economies of scale. This helps to reduce the average cost of production, enabling the monopolist to charge consumers lower prices (at least in theory).
• By producing on a larger scale, monopolist also help to improve the productive capacity of the economy (see Unit 1.4 - Production possibility curve).
• Monopolist are able to earn supernormal profit in the long run. This creates incentives for firms to be highly innovative and efficient to prevent new entrants from establishing themselves in the industry.
• Strategically, it may be important for an economy to have certain monopolies (such as pharmaceutical companies) as the supernormal profits enable these firms to earn sufficient fund for research and development (R&D) for societal gains. It can also enable these domestic monopolists to compete in international markets.
• Competition can be wasteful in some cases. Some industries may be better suited for natural monopolies. This refers to situations where the market can only sustain one firm and eliminates wasteful competition, such as the provision of public transport services, postal services, and electricity generation. In these cases, monopolies may be better suited for the provision of public goods and merit goods.

Is there any incentive for monopolists to reduce prices?

The disadvantages of monopoly include the following points:

• As there is no competition in a market with a single supplier, the monopolist can charge higher prices and produce lower output than would otherwise be the case. As the monopolist is a price maker, it can limit market supply, thereby charging higher prices than in highly competitive markets. This is clearly a disadvantage for consumers.
• Without the threat or presence of competition, monopolistic markets are less efficient than perfective competitive markets. Inefficient production is a disadvantage for society as a whole.
• The lack of any competition could mean the monopolist becomes complacent and has no incentive to improve its products or to innovate. For example, a private sector rail company that does not face any competition may provide an unreliable service. This is detrimental to individuals and the wider economy.
• Monopolists can establish artificial barriers to entry in order to prevent new entrants into the market. These obstacles are essentially the sources of monopoly power as they minimise the threat, if any, of new firms setting up in the industry. However, this is anti-competitive and is deemed to be illegal in many countries.
• Imperfect knowledge about prices and products of firms with monopoly power means that consumers may make sub-optimal decisions or irrational choices. For example, mobile phone network providers use very confusing pricing packages for their services. Similarly, commercial banks offer a variety of interest rate charges for their various types of loans and credit card services.

Case Study 2 - Apple's anti-competitive practice

In 2022, the European Union (EU) successfully passed a law that required Apple (and other manufacturers of electronic devices) to make their products compatible with a USB-C type charger. This will save consumers money who no longer have to buy chargers that are not compatible with other products as well as reducing electronic waste. Critics argued that the plastic covering the wires on Apple chargers (called "Lightening" chargers) tended to wear out before the useful life of the device and consumers often had to purchase another expensive charger from Apple.

Note: Given there are both advantages and disadvantages of monopolies, governments will intervene if a dominant firm in an industry is seen to be acting against the public interest, perhaps by deliberately restricting competition or by price fixing. In such cases, the government may step in to break up the firm's monopoly powers.  For example, a merger to takeover may be prohibited by regulators if the resulting firm has market share (or market dominance) deemed to be against the interest of society.

To test your understanding of this topic in the syllabus (Monopoly markets), have a go at answering the following true or false questions.