Monopoly

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    Monopoly

    Definition: A monopoly is a situation where the market is dominated essentially by one firm. The

    legal definition of “monopoly” is a firm that has 25% or more market share in the

    market.

    Advantages and Disadvantages of Monopolies

    Advantages

    • Firms usually makes higher profits
    • The firm can use profits to invest in new or improve upon existing products
    • Price Maker because does not face any competitors
    • Economies of Scale: Increased output will allow average unit prices of production to drop. This can be passed onto consumers in the form of lower prices, so customers may be more inclined to buy the firms products in the future.
    • A firm may become a monopoly through efficiency; A monopoly is thus a sign of success and not inefficiency.

    Disadvantages

    • Consumers may have to pay higher prices due to lack of competition
    • Consumers have less choice because market is dominated by the monopolistic firm.
    • Less innovation of products
    • Firms may not be efficient with allocation and utilization of resources because they do not have any pressure to reduce costs.

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