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For example, a monopoly is needed in a natural monopoly like tap water.

It depends on the industry in question.

See also: Advantages of Monopolies Evaluation of monopolies Eurotunnel has a monopoly on train services from London to Paris, but faces competition from airlines. Also, a monopoly may face competition from related industries, e.g. In this case, it is their market dominance which comes from being innovative and meeting a consumer demand.Ī domestic monopoly may face competition from abroad, and therefore what may appear as a monopoly may still face competitive pressures. You could make a similar case for firms, such as Apple and Amazon. It is hard to argue Google has x-inefficiency because of its monopoly power. Google gained monopoly power through offering innovative new products. A firm may gain monopoly power because it is the most efficient In many industries which require substantial investment – a competitive industry with many small firms would be unsuitable.ģ. This is important for industries like medical drugs which require a lot of risky investment.

Monopolies make supernormal profit which can be invested in Research & Development. Therefore, for natural monopolies and industries with significant economies of scale, monopolies can be more efficient. In the above example If there were 3 firms producing 3,000 units at an average cost of £17, average costs would be higher than a monopoly producing 10,000 units, and an average cost of £9.This can lead to lower prices for consumers.

If there are significant economies of scale, a monopoly can benefit from lower average costs.See also: Disadvantages of Monopolies Advantages of monopoly In some markets – clothing, choice is as important as price Consumers in a monopoly market face a lack of choice. A monopoly faces a lack of competition, and therefore, it may have less incentive to work at product innovation and develop better products. – higher average costs because it gets too big and difficult to coordinate. Diseconomies of scale – It is possible that if a monopoly gets too big it may experience dis-economies of scale.This is because farmers have little alternative but to supply supermarkets who have dominant buying power. supermarkets have been criticised for paying low prices to farmers.

Higher prices to suppliers – A monopoly may use its market power (monopsony power) and pay lower prices to its suppliers.A monopolist makes Supernormal Profit Qm * (AR – AC ) leading to an unequal distribution of income in society. – It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms.Therefore the AC curve is higher than it should be. Productive inefficiency A monopoly is productively inefficient because the output does not occur at the lowest point on the AC curve.(this is net loss of producer and consumer surplus)

A monopoly results in dead-weight welfare loss indicated by the blue triangle. In a competitive market, the price would be lower and more consumers would benefit from buying the good. A monopoly is allocatively inefficient because in monopoly (at Qm) the price is greater than MC. Firms with monopoly power can set higher prices (Pm) than in a competitive market (Pc). For example, Tesco market share or Google 90% of search engine traffic.Ī monopoly maximises profits where MR=MC (at point m).

In the UK a firm is said to have monopoly power if it has more than 25% of the market share.

A pure monopoly is defined as a single seller of a product, i.e.