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Market analysis
Competition keeps prices near cost and gives choice; a monopoly can charge more and produce less — unless its size makes it cheaper, as with water pipes or power lines. Analysing a market means asking which of these is true.
Need to know
What you need to know
- Competitive market: many sellers, price near cost, low prices, wide choice, normal profit in the long run.
- Monopoly: one dominant seller, barriers to entry, higher price, lower output, supernormal profit.
- The key difference is pricing power: competitive firms are price takers, a monopoly is a price maker.
- Barriers to entry — patents, high start-up costs, control of resources, legal protection — are what keep a monopoly in place.
Explanation
Market analysis
- Competitive markets push price towards cost and reward low costs and quality.
- A monopoly can restrict output and raise price behind barriers to entry.
- Economies of scale and natural monopoly can make one large supplier cheaper.
- Governments respond with competition law, regulation, ownership changes or lower barriers.