In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a market situation where there is only one provider of a product or service. Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service. It should also, strictly, be distinguished from the (closely related) phenomenon of a cartel (which is a type of oligopoly), in which a centralized institution is set up to (partially) coordinate the actions of several independent providers — as opposed to monopoly, in which there is one sole provider — although, in some cases, that sole provider may have been created by consolidating several formerly independent firms.
Monopolies are characterized by a lack of economic competition for the good or service that they provide (and a lack of viable substitute goods), as well as high barriers to entry for potential competitors in the market.
They can arise because of the peculiar features of a particular market — such as when a monopolist controls a unique natural resource or technological achievement. When a monopoly arises from laws which explicitly forbid competition (or effectively prevent it through heavy regulation and subsidy), it is described as a government-granted monopoly (sometimes called a coercive monopoly). The term state monopoly is sometimes used to describe a type of government-granted monopoly in which government, either directly or indirectly through legislation, exercises significant control over the monopolist's decisions, and typically include industries that import, manufacture, and/or distribute alcohol, money, stamps, drugs, munitions, and gambling. The term "natural monopoly" is sometimes used to describe monopolies that come about because production conditions make a sole provider most efficient.
The term is sometimes (loosely) used to describe companies such as Microsoft or Standard Oil, which do face market competition, but which command a large market share and use their size to compete in ways which are considered unfair — such as dumping products below cost to harm competitors, creating tying arrangements between their products, and other practices regulated under Antitrust law.
Large corporations often attempt to monopolize markets through horizontal integration, in which a parent company controls consolidates control over several small, seemingly diverse companies (sometimes even using different branding to create the illusion of marketplace competition). A magazine publishing firm, for example, might publish many different magazines on many different subjects, but it would still be considered to engage in monopolistic practices if the intent of doing this was to control the entire magazine-reader market, and prevent the emergence of competitors.
The economic incentives for a monoply make it likely that they will sell a lower quantity of goods at a higher price than firms would in a purely competitive market in order to secure monopoly profits. This will typically lead to an outcome which is inefficient in the sense of Pareto efficiency. It is also often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they don't have to be efficient or innovative to compete in the marketplace. Some argue that it is good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term. Once the firm grows too big, it can then be dealt with via regulation.
Sometimes, though, this very loss of efficiency can raise the potential value of a competitor enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives.
When monopolies are not broken through the open market, often a government will step in to either regulate the monopoly, or forcibly break it up (see Antitrust law). Public utilities in many locations are an example of the former. AT&T is a good example of the latter. When it was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long-distance phone market and started to take phone traffic from the less efficient AT&T.
In economics a company is said to have monopoly power if it faces a downward sloping demand curve (see supply and demand). This is in contrast to a price taker that faces a horizontal demand curve. A price taker cannot choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell more.
If a monopoly can only set one price it will set it where marginal cost (MC) equals marginal revenue (MR) as seen on the below diagram. This can be seen on a supply and demand diagram for the firm. This will be at the quantity Qm and at the price Pm. This is above the competitive price of Pc and with a smaller quantity that the competitive quantity of Qc. The profit the monopoly gains is the shaded in area labeled profit.
As long as the price elasticity of demand (in absolute value) for most customers is less than one, it is very advantageous to increase the price: the seller gets more money for less goods. With an increase of the price the price elasticity tends to rise, and in the optimum mentioned above it will for most customers be above one.
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