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Monopoly and oligopoly
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Some markets are dominated by one firm or by a few. These market structures behave very differently from competitive markets.
Monopoly
A monopoly is a market with a single business (a pure monopoly). It sells a unique product with no close substitutes and is a price maker (it can set its price).
Barriers to entry keep rivals out: legal barriers and patents, huge marketing budgets, control of technology, and high start-up costs.
Barriers to entry keep rivals out: legal barriers and patents, huge marketing budgets, control of technology, and high start-up costs.
Monopoly: good or bad?
Disadvantages: higher prices, less choice, possibly lower quality and less innovation (no pressure to improve), and possible inefficiency.
Advantages: economies of scale can lower costs; high profits can fund research and innovation.
Advantages: economies of scale can lower costs; high profits can fund research and innovation.
Oligopoly
An oligopoly is a market dominated by a few large firms, such as supermarkets or mobile networks.
Features: differentiated products, barriers to entry, interdependence and non-price competition (branding, loyalty cards, advertising).
Firms may collude, agreeing to fix prices (a cartel), which is illegal in many countries and bad for consumers. Or they may start price wars, which benefit consumers in the short run.
Features: differentiated products, barriers to entry, interdependence and non-price competition (branding, loyalty cards, advertising).
Firms may collude, agreeing to fix prices (a cartel), which is illegal in many countries and bad for consumers. Or they may start price wars, which benefit consumers in the short run.
Four supermarkets have 70% of a country's grocery sales. What market structure is this?
- A few large firms dominate.
- There are barriers to entry and branding.
Answer: Oligopoly
Monopoly: one firm, unique product, price maker, barriers to entry. Can mean high prices and less choice, but economies of scale and innovation. Oligopoly: a few large firms, differentiated products, non-price competition, possible collusion or price wars.
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