Tesla held an 82% market share of the electric vehicle market in the United States during the first half of 2020 - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 1

A monopoly is characterized by a single seller dominating the market, which can lead to different outcomes regarding efficiency.

Case for Monopoly Efficiency

1. Productive Efficiency: A monopoly can achieve productive efficiency by operating at the lowest point on the average cost (AC) curve due to economies of scale. For instance, larger companies can negotiate purchasing prices and reduce costs, allowing them to lower consumer prices in the long run.
2. Allocative Efficiency: If the price charged is equal to the marginal cost (P = MC), a monopoly can achieve allocative efficiency. However, this rarely occurs as monopolies often set prices above MC.
3. Dynamic Efficiency: Monopolies can reinvest profits into technological advancements and lower costs over time, potentially increasing the average revenue (AR).

Case Against Monopoly Efficiency

1. X-inefficiency: Due to a lack of competition, monopolies may experience organizational slack, which leads to inefficiencies.
2. Allocative Inefficiency: Monopolies exhibit price-making power, often charging a higher price than the marginal cost, leading to a deadweight loss (DWL). In such cases, consumer surplus is reduced, and the firm increases profits.
3. Dynamic Inefficiency: Monopolies may prioritize shareholder dividends over reinvestment in innovation, stalling technological advancement.
4. Compliance with Regulations: Monopolies may engage in practices that are not only self-serving but also influenced by regulatory frameworks that can inhibit efficiency.

Example: The Case of Microsoft

Microsoft is often cited as a monopoly due to its substantial market share in operating systems. While it has benefited from economies of scale, concerns around innovation and product development have been raised, particularly regarding its approach to competition and consumer pricing.