A monopoly is a market structure characterized by a single seller dominating the entire market. This means there is only one firm producing a good or service, and no close substitutes are available. This gives the monopolist significant market power, allowing them to influence the market price.
Key Characteristics of a Monopoly
Single Seller: Only one firm controls the entire supply of the product.
No Close Substitutes: Consumers have limited or no alternative products to choose from.
High Barriers to Entry: Significant obstacles prevent other firms from entering the market and competing. These barriers can be legal, technological, or economic.
Price Maker: The monopolist has considerable control over the price of the product. They are not simply a price taker like firms in competitive markets.
Barriers to Entry
Several factors can create barriers to entry, sustaining a monopoly position:
Legal Barriers: Patents, copyrights, and government licenses can restrict entry.
Control of Essential Resources: A firm may control a crucial resource needed to produce the good or service.
High Start-up Costs: Extremely high initial investment requirements can deter potential competitors.
Network Effects: The value of a product or service increases as more people use it (e.g., social media platforms).
Economies of Scale: The monopolist's large-scale production leads to lower average costs, making it difficult for smaller firms to compete.
Demand Curve for a Monopolist
The monopolist faces the entire market demand curve, which is downward sloping. This means that to sell more, the monopolist must lower the price.
Suggested diagram: A downward sloping demand curve representing the market demand faced by the monopolist. The marginal revenue curve lies below the demand curve. The profit-maximizing quantity is where MR = MC.
Profit Maximization for a Monopoly
Like any firm, a monopolist maximizes its profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). The price is then determined by the demand curve at that quantity.
The monopolist's profit-maximizing output level is determined by the intersection of the MR and MC curves. The corresponding price is then found on the demand curve.
Diagram of Profit Maximization
Price (P)
Quantity (Q)
Demand Curve
Marginal Revenue Curve (MR)
Marginal Cost Curve (MC)
Profit Maximizing Point
Consumer Welfare and Monopoly
Monopolies typically result in lower output and higher prices compared to competitive markets. This leads to a deadweight loss, representing a loss of economic efficiency. Consumers pay a higher price and purchase a smaller quantity than they would in a competitive market. The monopolist captures a larger share of consumer surplus.
Government Regulation of Monopolies
Governments often regulate monopolies to protect consumers and promote competition. Common regulatory approaches include:
Price Controls: Setting a maximum price that the monopolist can charge.
Regulation of Output: Requiring the monopolist to produce a certain quantity.
Antitrust Laws: Preventing monopolies from forming or abusing their market power. This includes breaking up existing monopolies.
Subsidies: Providing financial assistance to competing firms.
Examples of Monopolies
Examples of monopolies (or near-monopolies) can be found in various industries, such as:
Utilities: Water, electricity, and gas companies often operate as regulated monopolies.
Pharmaceuticals: Companies with patents on drugs may have temporary monopolies.
Software: Some software companies have dominant market shares.