Monopolies

Monopolies: Interactive Reading Quiz

Based on Unit 6, Reading 2 from the Macmillan Guide to Economics. Check how well you understand monopoly, takeovers and market power.

Before You Take the Quiz: Key Ideas About Monopolies

In economics, a monopoly exists when one company has such a large market share that other companies cannot really compete. In a pure monopoly, there is only one company supplying a particular product or service. This is the exact opposite of perfect competition, and the normal laws of supply and demand may not work in the usual way.

Monopolies can appear in different ways. A natural monopoly can happen when a company achieves an economy of scale: its variable costs increase more slowly than supply increases. Monopolies can also be created through takeovers. A vertical takeover happens when a company buys a supplier; a horizontal takeover happens when a company buys a competitor. A legal monopoly is created by law, and a state monopoly is run by the government, for example the postal service in many countries.

Many monopolies are criticised because they can reduce competition and consumer choice. A company with monopoly power may become a price maker, and it may have less reason to invest in innovation. Understanding how monopolies form helps explain why governments often regulate markets and try to prevent companies from becoming too powerful.

Key terms to remember:

• market share — the part of the market controlled by a company
• pure monopoly — only one company supplies a product or service
• natural monopoly — a monopoly that happens because of economies of scale
• economy of scale — variable costs increase more slowly than supply
• takeover — one company buys another company
• price maker — a company that has power to set prices

Discussion

Can you think of an industry in your country where one company dominates the market? Is this good or bad for consumers? Share your opinion in the comments.