Monopoly characteristics, benefits, drawbacks.

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Characteristics of Monopoly

1. Only one firm

2. High barriers to entry:

  • Capital costs and expertise
  • Economies of scale
  • Legal restrictions e.g patents
  • Advertising
  • Brand proliferation

3. Exit barriers

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Monopoly Diagram

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Benefits of Monopoly

1. Abnormal profits can be invested into R&D or funds for investment (dynamic efficiency).

2. Cross-subsidisation of markets may lead to an increased range of goods or services. It can thus provide goods that would otherwise not be provided.

3. Can take advantage of economies of scale, lowering cost per unit.

4. Avoids duplication and wasteful advertising, some are natural monopolies.

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Drawbacks of Monopoly

1. Abnormal profit may mean little incentive to be dynamically efficient and develop new products.

2. High prices and lower output for consumers, reduced consumer surplus.

3. Can waste resources by using profits from one part of the business to finance losses in another.

4. May engage in price discrimination to raise producer surplus, reducing consumer surplus

5. Produce at allocatively and productively inefficient levels.

6. Deny consumers variety and choice which is available in competitive markets

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