Market analysis — common mistakes

A good answer on monopoly never says only 'bad for consumers'. Write: 'A monopoly is likely to charge higher prices... however if it has significant economies of scale, prices may be lower than under competition.' That 'however' is where the evaluation marks live.

For 'discuss whether the government should break up a monopoly', build the answer round one question: is it a natural monopoly? If yes, regulate rather than break up; if no, more competition will probably lower prices — unless the firm's scale is what funds its innovation.

No. If a monopoly has large economies of scale, especially a natural monopoly, its costs and even its prices can be lower than many small firms could manage, and its profits can fund innovation. The harm comes when there is no pressure to pass savings on.

If firms collude on prices (a cartel), or if network effects or brand loyalty mean customers will not switch, a few firms can hold prices up despite the numbers. Analysing barriers and switching costs matters more than counting firms.

Regulation keeps the single firm but limits its prices and sets standards — the usual choice for natural monopolies. Breaking it up creates competing firms, which works when there are no large economies of scale to lose.