What is a Monopoly?

Published by Thomas Herold in Economics, Laws & Regulations

'Monopoly' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Monopolies refer to markets where a single producer or supplier controls all or nearly all of the market. This means that they have the ability to set prices for the good or service they produce. For there to be a true monopoly, there can not be any near substitutes for the product in question. The term monopoly has also come to represent the company which dominates the market of the good or service. Monopolist is another better name for the supplier who controls the market.

When a monopoly exists, there is no competition in the price of the good or service. The monopolist is able to set the price. They will usually choose to make it as high as the market will bear.

Monopolies usually occur because there are particular factors that prevent other companies from competing effectively against the monopolist. These factors are called barriers to entry. There are a number of different barriers to entry which can cause a monopoly to arise.

Sometimes a company exclusively owns a critical resource that companies need to produce the product. This can help it to become a monopoly. Exclusive knowledge of a process to make something would also count as sole ownership of a critical resource. This is what makes pharmaceutical companies monopolies in various types of medicine which they develop and first release.

Government protected ideas can also create monopolies. This can exist in the form of copyrights and patents. In these protections, the government guarantees these companies a minimum period of time to produce the goods or services without any competition. This creates a temporary monopoly until the intellectual property protection expires.

Markets where a good or service is new typically see these types of monopolies. Governments justify copyrights and patents as the means to encourage invention and innovation. Without this temporary protection, many companies would not invest resources needed to create new inventions and products.

A related monopoly is a government franchise. Governments create these types of monopolies when they give the exclusive ability to operate in an industry to a single business. This could happen with a business that is owned by the government or a private company. Train operators and mail delivery companies like the postal service are good examples of this type of government franchise.

Natural monopolies sometimes arise on their own without government help or intervention. This is most often the case when the costs are lower for a single company to service the whole market. Numerous smaller companies competing against each other could actually raise costs and prices in these instances.

Some companies have limitless economies of scale. This means that they are so large and powerful in an industry that no new players could compete with their prices. This could be because the costs to enter the industry are so high that no one will bother. They also represent natural monopolies. There are a number of technology infrastructure companies in this position. Some of the more common industries where these types of natural monopolies occur include telephone operators, Internet service, and cable television providers.

It is not always clear if a company possess a monopoly in a given industry. Some people consider certain brands to be monopolies because of how popular they are. This is true even when they do not control all of the product market share.

The Coca Cola Company has a monopoly on producing the soft drink Coke. This is not the only soft drink on the market, but there is no exact substitute for it. Even though rivals Pepsi Cola and Dr Pepper Snapple Group control a large share of the soft drink market, neither of them produces Coke. This is why the debate for monopolies continues to rage on about what constitutes a close substitute. Anti-monopoly regulators constantly wrestle with the question.

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The term 'Monopoly' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.