Non-Competitive Markets: Monopoly & Oligopoly
When Markets Lose Competition
In a non-competitive market, competition is weak or absent. Instead of dozens of firms all trying to undercut each other, one firm — or a handful — dominates the whole market. This changes everything for consumers: prices tend to rise, choice narrows, and the pressure to innovate or cut costs disappears. Understanding non-competitive markets matters because they are everywhere in the real world, from your broadband provider to the operating system on your phone.
Economists distinguish market structures partly by asking: how many sellers are there, how similar are the products, and how easy is it for a new firm to enter? In a competitive market, entry is easy and no single firm can dictate price. Move along the spectrum and you reach monopoly at one extreme — a single dominant supplier with enormous market power.
For the purposes of GCSE Economics, a firm is said to have monopoly power if it holds 25% or more of market supply — this is the share-of-supply threshold used in merger control under the Enterprise Act 2002. A firm with 100% of the market is a pure monopoly, but even a firm with a large share can exercise significant monopoly power. The Competition and Markets Authority (CMA) investigates firms suspected of abusing that power.
Barriers to Entry: The Wall That Keeps Rivals Out
Monopoly power is sustained by barriers to entry. Without these barriers, high profits would attract new competitors, eroding the dominant firm’s advantage. The main barriers are:
High start-up costs. Building a national railway network, laying undersea cables or constructing a semiconductor factory costs billions of pounds. Few new entrants can raise this capital, so existing firms are protected by sheer scale.
Economies of scale. A dominant firm producing millions of units has much lower average costs than a new entrant producing a few thousand. The new entrant cannot price competitively until it reaches the same scale — but it cannot grow until it attracts customers away from the cheaper incumbent. This is a catch-22 that keeps many rivals out.
Patents and legal protection. Pharmaceutical companies hold patents giving them the exclusive right to produce a drug for around 20 years. During that window, the patent-holder is the only legal supplier and can charge a high price. Once the patent expires, generic manufacturers enter and prices fall sharply.
Brand loyalty and switching costs. Customers who are deeply familiar with a product, or who would face cost and inconvenience in switching, are ‘locked in’ even if a rival offers a better deal. A student who has used the same cloud storage service for years may stay even if a cheaper alternative exists, simply because transferring files is tedious.
How a Monopolist Behaves: Price Maker, Not Price Taker
In a competitive market every firm is a price taker: it accepts the market price and cannot charge more without losing all customers to identical rivals. A monopolist faces no such constraint. It is a price maker — it sets its own price by choosing how much output to produce. To sell more, it lowers its price; to push the price up, it restricts supply. This is the core of monopoly power.
Imagine a single internet provider in a rural area where no other network reaches. Residents must either pay the provider’s price or go without broadband. The provider has no incentive to cut prices, improve service or invest in the fastest technology unless a rival threatens to enter its market. Without competition, consumer welfare suffers.
Not every consequence of monopoly is negative. A large firm that dominates its market can benefit from significant economies of scale, driving its average costs down. If it passes some of those savings to consumers through lower prices, the outcome may be better than having many small, high-cost rivals.
Large dominant firms also tend to invest more heavily in research and development (R&D). A pharmaceutical giant earning high profits on patented drugs can afford to spend billions searching for new treatments. A small competitive firm operating on thin margins may not have the resources to fund the same level of innovation. This argument is often used to defend the patent system: the promise of temporary monopoly profits incentivises the risky, expensive work of discovering new medicines and technologies.
There are also cases where having a single large supplier is simply more efficient — these are called natural monopolies. Laying duplicate water pipes or electricity cables to every home would be wasteful. In such industries, one network provider is cheaper than two or three, so regulation rather than competition is the preferred solution.
Oligopoly: Competition Between the Few
Most real markets sit between perfect competition and pure monopoly. Oligopoly is the most common non-competitive structure in advanced economies. Think of the UK supermarket sector, where a handful of large chains — including Tesco, Sainsbury’s, Asda, Aldi and Morrisons — account for the majority of grocery sales. By 2025, Aldi had overtaken Morrisons to become the fourth-largest grocer by market share, reflecting how discounters have disrupted the traditional market. Or consider the UK mobile network market, where a small number of providers share the vast majority of customers.
The defining feature of oligopoly is interdependence: each firm’s decisions about price, output and advertising are influenced by what it expects its rivals to do. If one supermarket cuts prices on bread, the others must decide whether to match the cut or risk losing customers. This makes oligopoly markets dynamic and sometimes unpredictable.
Oligopolists face a choice. They can compete fiercely — cutting prices, ramping up advertising, launching new products — which pushes prices down and benefits consumers but squeezes their own profits. This is a price war, and it can be damaging for all firms involved.
Alternatively, they can act together. Collusion occurs when rival firms co-ordinate their behaviour rather than competing. In its most obvious form, they meet secretly to fix prices — this is called a cartel. Cartels are illegal under UK competition law (Competition Act 1998, enforced by the CMA) because they eliminate competition and harm consumers through artificially high prices.
Collusion can also be tacit: firms follow the price leader without any formal agreement. If one airline raises its prices and rivals quietly follow suit, prices settle at a higher level without a single phone call being made. Tacit collusion is harder to prosecute but has the same effect — consumers pay more.
The Impact on Consumers and Workers
The clearest cost of non-competitive markets falls on consumers. A price maker charges more than a price taker would. Because the monopolist or oligopolist faces limited competitive pressure, it also has less reason to improve quality, reduce waiting times or invest in customer service. Choice is restricted — consumers cannot easily find an equivalent alternative. In the most extreme cases, consumers must accept whatever the single supplier provides or go without.
Workers are also affected. In highly competitive labour markets, firms bid up wages to attract staff. A firm with substantial market power, however, can sometimes extend that power into the labour market, suppressing wages — a situation economists call monopsony power in the labour market. Conversely, the higher profits earned by dominant firms can sometimes fund better pay and conditions for their own employees.
Monopoly and oligopoly typically lead to higher prices, less choice, and lower quality for consumers compared with competitive markets. However, large dominant firms may invest more in R&D, achieve greater economies of scale, and in natural-monopoly industries a single supplier can be more efficient than many competing networks.
Government Regulation of Monopoly Power
Because of the harm non-competitive markets can cause, governments intervene. The Competition and Markets Authority (CMA) in the UK can investigate mergers that would create a dominant firm, break up companies if market power is being abused, and impose fines on firms found to be running cartels or engaging in anti-competitive behaviour. The CMA can also order a dominant firm to allow rivals access to its infrastructure — for example, requiring a dominant broadband network owner to let competing providers use its cables at a fair price.
In natural monopoly industries such as water and energy, the government uses price regulation to cap what companies can charge. A regulator sets a maximum price that the natural monopolist may charge, preventing it from exploiting consumers while still allowing it to earn enough to maintain and invest in its network.