Monopoly and oligopoly

Monopoly

A monopoly exists where a single firm dominates a market to the extent that it faces no effective competition. In practice, competition law in the UK investigates firms with significant market share (25%+) for potential abuse of dominance — a firm need not have literally 100% of a market to behave monopolistically.

Causes of monopoly power:

• High barriers to entry — capital costs, economies of scale, or regulatory licences prevent rivals from entering.
• Natural monopoly — in some industries (water, gas, electricity networks) the infrastructure costs are so high that it is most efficient for one firm to supply the whole market. Duplication would be wasteful.
• Patents and intellectual property — legal protection prevents rivals from using the same technology or formula (e.g. pharmaceutical drugs).
• Control of essential resources — a firm that controls a key input can exclude rivals.

Consequences of monopoly power:

• Higher prices — the monopolist is a price-maker; it can charge above competitive levels.
• Restricted output — a monopolist may produce less than would occur in a competitive market, creating consumer losses.
• Less innovation — without competitive pressure, the incentive to improve products is reduced.
• Productive inefficiency — without threat of entry, firms may not minimise costs.
• However: scale economies may allow monopolists to produce at lower average cost than many small competing firms could achieve; profits may fund R&D investment.

Oligopoly

An oligopoly is a market dominated by a few large firms. UK examples: supermarkets (Tesco, Sainsbury's, Asda, Morrisons); mobile networks (EE, Vodafone, O2, Three); banks; energy suppliers.

Key features of oligopolistic markets:

• Interdependence — each firm's decisions (pricing, marketing, new products) affect and are affected by rivals. Firms must consider how competitors will respond.
• Price rigidity / price wars — oligopolists are often reluctant to raise prices (fearing rivals will undercut) or cut prices (fearing a price war that leaves all firms worse off). Prices can be sticky. But price wars do occur — petrol forecourts and supermarkets periodically engage in aggressive price cutting.
• Non-price competition — firms compete through advertising, loyalty schemes, product differentiation, and customer service rather than price alone.
• Collusion — firms may (illegally) agree to fix prices or divide markets. This harms consumers and is prohibited by competition law.