IB DP Economics - Unit 2 - Monopoly (single/dominant firm, high barriers, no close substitutes)-Study Notes - New Syllabus

Monopoly (HL)

Single or Dominant Firm, High Barriers to Entry, No Close Substitutes

Monopoly is a market structure where a single firm or a dominant firm controls the entire market, facing little or no competition due to strong barriers to entry and lack of close substitutes.

Monopoly → Market power → Price maker

1. Single or Dominant Firm

In a monopoly, there is only one firm or one firm dominates the market.

Explanation:

• The firm is the sole producer of the good or service.
• It has significant market power to influence price.
• The firm is a price maker, not a price taker.
• Consumers have no alternative suppliers.

Impact:

• Firm can set prices above cost.
• May earn abnormal profits in the long run.
• Reduced competitive pressure.

2. High Barriers to Entry

Barriers to entry are obstacles that prevent new firms from entering the market.

Explanation:

• Barriers protect the monopoly from competition.
• They allow the firm to maintain market power.
• Common barriers include:
  • Legal barriers (patents, licenses)
  • High start-up costs
  • Control over key resources
  • Economies of scale

Impact:

• Prevents new firms from entering the market.
• Allows sustained abnormal profits.
• Reduces competition.

3. No Close Substitutes

In a monopoly, there are no close substitutes for the product.

Explanation:

• Consumers cannot easily switch to alternative products.
• Demand is relatively inelastic.
• The firm has greater control over pricing.

Impact:

• Consumers have limited choice.
• Firm can charge higher prices.
• Potential for consumer exploitation.

Economic Logic (HL Insight):

• Market power arises due to barriers to entry and lack of substitutes.
• The firm faces the market demand curve, which is downward sloping.
• This leads to potential inefficiency and welfare loss.