Lesson Overview
Unlike perfect competition, some markets are dominated by one firm or a few firms, giving them significant market power.
This lesson introduces monopolies and oligopolies, explores how they set prices, and examines the consequences for efficiency and consumers.
Learning Objectives
- Define monopoly and oligopoly and identify key characteristics.
- Explain how firms with market power determine price and output.
- Understand barriers to entry and how they sustain monopoly power.
- Analyze efficiency losses and economic consequences of limited competition.
Monopoly
A monopoly exists when a single firm controls the entire market for a product or service. Monopolists are price makers — they choose the price that maximizes profit.
Key Characteristics
- Single seller dominates the market.
- No close substitutes for the product.
- High barriers to entry prevent new firms.
- Price maker: can influence market price.
Economic Effects
- Higher prices than in competitive markets.
- Reduced output relative to efficient allocation.
- Potential for long-run economic profit.
Oligopoly
An oligopoly exists when a few firms dominate a market. Firms may compete aggressively or collude to increase profits.
Key Characteristics
- Few large firms control most of the market.
- Products may be identical or differentiated.
- Barriers to entry limit competition.
- Interdependent pricing: each firm's decisions affect others.
Economic Effects
- Prices are often higher than in perfect competition.
- Output may be restricted to increase profits.
- Collusion can lead to monopoly-like outcomes.
Barriers to Entry
- Economies of scale.
- Government regulations or patents.
- Control of essential resources.
- High startup costs.
Efficiency and Welfare
Markets with limited competition often result in allocative inefficiency (P > MC) and productive inefficiency (not producing at minimum ATC).
Consumers may pay higher prices and receive less output, while firms earn above-normal profits.
Practice Questions
- What differentiates a monopoly from an oligopoly?
- Explain why a monopolist is a price maker but a firm in perfect competition is a price taker.
- Identify barriers to entry that sustain a monopoly.
- Discuss the potential welfare loss in oligopolistic markets.
Reflection
Consider an industry you interact with:
- Is it competitive, oligopolistic, or a monopoly?
- How does market power affect prices and consumer choice?
What’s Next?
You’ve completed Unit 2. Next, we’ll move to macroeconomics, where we zoom out to study the economy as a whole—tracking GDP, inflation, unemployment, and business cycles—and see how individual choices add up to national trends.