What happens to prices and choice when one or a few firms dominate a market?
The meaning of monopoly and oligopoly, how they differ from competitive markets, and their effects on prices, choice and efficiency.
An OCR J205 answer on monopoly and oligopoly: their meaning, how they differ from competition, and their effects on prices, choice, efficiency and innovation, with arguments for and against.
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What this dot point is asking
OCR wants you to define monopoly and oligopoly, explain how they differ from a competitive market, and evaluate their effects on prices, choice and efficiency. This is the other side of the competition topic: what happens when markets are dominated by one or a few firms.
Monopoly
Because a monopoly faces little or no competition, it can:
- charge higher prices than a competitive market would,
- offer less choice and have less pressure to improve quality,
- be less efficient, since there is no rival to lose customers to.
This is why monopolies are often seen as harmful to consumers, and why governments regulate them.
Oligopoly
In an oligopoly, firms often avoid price wars (which hurt everyone's profits) and compete instead on non-price factors such as branding, loyalty schemes and advertising. Prices can be "sticky" because no firm wants to start a price war. Where firms secretly agree to fix prices (collusion), consumers are harmed, which is why this is illegal.
Comparing market structures
| Feature | Competition | Oligopoly | Monopoly |
|---|---|---|---|
| Number of firms | Many | A few | One dominant |
| Price | Low (price takers) | Some power, often sticky | High (price maker) |
| Choice | Wide | Moderate | Limited |
| Efficiency | Strong incentive | Weaker | Weakest incentive |
The case for large firms
Dominant firms are not always bad for consumers:
- Economies of scale. A large firm can produce at a lower average cost, and if savings are passed on, prices can fall.
- Funds for innovation. Large profits can finance research and development that small firms could not afford, for example new medicines or technology.
- Natural monopoly. In industries with huge fixed costs (water, rail), one firm may genuinely be the cheapest provider, so a regulated monopoly can beat wasteful duplication.
Try this
Q1. Define an oligopoly. [2 marks]
- Cue. A market dominated by a few large, interdependent firms each with a significant market share.
Q2. Explain one reason a monopoly might charge higher prices than a competitive market. [3 marks]
- Cue. With no close rivals, customers cannot easily switch, so the monopolist can raise its price as a price maker without losing all its sales.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/01 20204 marksExplain the difference between a monopoly and an oligopoly.Show worked answer →
A 4 mark Explain question.
A monopoly is a market dominated by a single firm (in the strict sense one seller, in practice one firm with a very large market share) that has significant power to set its own price.
An oligopoly is a market dominated by a few large firms, each big enough to affect the price and aware that its rivals will react to what it does. Markers reward the contrast between one dominant firm (monopoly) and a few dominant firms (oligopoly), ideally noting that oligopolists are interdependent.
OCR J205/01 20226 marksDiscuss whether a monopoly is always bad for consumers.Show worked answer →
A 6 mark evaluative question.
Against monopoly: a single firm with no rivals can charge higher prices, offer less choice, and have weaker incentives to innovate or be efficient, harming consumers.
In favour: a large monopoly can gain economies of scale, lowering average costs, and its large profits can fund research and investment that smaller firms could not afford (for example in pharmaceuticals). Some monopolies are natural monopolies where one firm is genuinely cheaper. Markers reward both sides and a supported judgement, for example that monopoly often harms consumers but can benefit them if cost savings are passed on or regulation prevents abuse.
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Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)