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IGCSEEconomicsCambridge (CIE)Revision Notes3. Microeconomic Decision-Makers3.7 Types of MarketsMonopoly Markets

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First teaching 2025

First exams 2027

Monopoly Markets (Cambridge (CIE) IGCSE Economics): Revision Note

Exam code: 0455 & 0987

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

Characteristics of monopoly markets

  • A monopoly is a market structure in which there is a single seller

Diagram showing characteristics of monopolies: high barriers to entry, single seller, imperfect information, unique products, and price makers.

  • There are no substitute products

    • The firms products are considered to be unique

  • The firm has complete market power

    • They are able to set prices and control output

      • This allows the firm to maximise profit

      • There is no long-run erosion of profit levels as competitors are unable to enter the industry

  • High barriers to entry exist

    • One of the main barriers is the ability of the monopoly to prevent any competition from entering the market

      • For example, by purchasing companies who are a potential threat

  • Many governments define a monopoly as any firm having more than 25% market share

    • Regulators act to prevent market share increasing beyond this level

    • It helps to maintain competition within the market
       

Advantages and disadvantages of monopoly power

  • When considering the pros and cons of monopoly power, it is useful to think about the pros and cons for different stakeholders

Evaluating monopoly power from the firm's point of view

Advantages

Disadvantages

  • Large profits generate money for continued investment in technology and product innovation

  • Market power enables the firm to increase its global competitiveness

  • Economies of scale can increase, thereby lowering the average cost

  • Price discrimination: the firm can charge consumers different prices based on the different price elasticity of demand for the product, e.g., peak (inelastic) and off-peak (elastic) travel on trains

  • Due to a lack of competition, there is a reduced incentive to be efficient

  • Cross-subsidisation can create inefficiencies

  • Monopolies lead to a misallocation of resources as they limit supply in order to increase price

  • Due to a lack of competition, innovation sometimes lacks effectiveness. 

Evaluating monopoly power from the employee's point of view

Advantages

Disadvantages

  • Large profits often result in higher wages

  • Having only one supplier in the industry limits the opportunity to change employers

Evaluating monopoly power from the consumer's point of view

Advantages

Disadvantages

  • Product innovation due to the firm's large profits may result in a better-quality product

  • Cross-subsidisation can lower prices on some products that the firm provides

  • Prices may fall. If firms pass on their cost savings to consumers (due to economies of scale) in the form of lower product prices

  • A lack of competition is likely to result in higher prices, as no substitute goods are available

  • A lack of competition reduces the need for product innovation and worsens product quality over time

  • May experience worse customer service as the incentive to improve it is limited

  • Cross-subsidisation is likely to increase prices on some products offered by the firm

Evaluating monopoly power from the supplier's point of view

Advantages

Disadvantages

  • Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally

  • There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers

The effect of having only one firm

  • Price: The monopoly can set prices above competitive levels

  • Quality: Quality may fall if there is no competitive pressure, but it can also improve if profits fund innovation

  • Choice: Very limited — consumers may have only one supplier

  • Profit: Monopolies can earn abnormal (supernormal) profits in the long run due to lack of competition

Examiner Tips and Tricks

When evaluating monopolies, demonstrate critical thinking by acknowledging the positives as well as the negatives. For example, Amazon has partly become a monopoly by being very good at what they do and consumers benefit from lower prices and greater choice. However, this power means that they can also abuse the suppliers on their platform

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.