A monopoly is the single seller of a good for which substitutes are not readily available. There should be high barriers to entry; i.e. other firms cannot enter the market easily and provide the good.

Monopolies often are created due to legal barriers. Patent laws grant inventors the exclusive right to produce and sell a product for a period of time (typically 17 years in the United States). Licensing restrictions often limit who is allowed to provide a good or service in a particular geographic area.

In some instances, economies of scale exist so that there is a tendency toward a natural monopoly - one firm can provide the good most efficiently. One traditional example is the distribution of electrical power to a local community. Duplication of power lines within a community would increase overall costs. With natural monopolies, government policy to encourage more entrants may not make sense.

To some degree, natural monopolies occur in the computer industry, where customers want to adhere to a common standard. The common standard for personal computer operating systems is provided by Microsoft. Alternative operating systems for personal computers (such as LINUX) do not make sense for most consumers, so Microsoft has considerable monopoly power.

The Monopolist and Profit Maximization
The monopolist has control both over the quantity produced and price charged; it also faces the entire demand curve for the good produced. Therefore, it will face a downward-sloping demand curve. It follows the general rule for profit maximization, MR = MC. As the monopolist does not know exactly how much consumers are willing to buy at particular prices, it must "search" for the optimum price.

Figure 3.12: Monopolist Profit Maximization



As shown in the graph above, a monopolist facing demand curve D0 will produce quantity Q0 and the price charged will be equal to P0.

What happens if the monopolist later faces a demand curve such as D1? In that case, the monopolist cannot cover costs and will go out of business.
Inefficiencies of Monopolies

Related Articles
  1. Insights

    How & Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality leaving consumers little choice. But monopolies can benefit consumers as well.
  2. Insights

    A History Of U.S. Monopolies

    These monoliths helped develop the economy and infrastructure at the expense of competition.
  3. Insights

    Understanding Monopolistic Competition

    Monopolistic competition exists in industries that have many firms offering similar products or services: for example, restaurants, supermarkets and clothing stores.
  4. Insights

    A History Of U.S. Monopolies

    Here are a few of the most notorious monopolies in U.S. history.
  5. Small Business

    How Monopoly Antitrust Laws Affect Consumers

    Monopolies often receive a negative reception, but sometimes they can benefit consumers.
  6. Small Business

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  7. Investing

    Early Monopolies: Conquest And Corruption

    This structure can be very effective, but it is also known for its abuse of power.
  8. Taxes

    Why Monopoly Is A Terrible Finance Teacher

    With its plethora of inaccuracies, Monopoly doesn't offer the best lessons in real-world finance.
  9. Investing

    3 Groups of Companies that are almost a Monopoly

    A look at companies that have a monopolistic place in the marketplace, and whether or not it's a good idea to invest in them.
  10. Investing

    Monopoly-Like Companies

    We might not have monopolies, but some businesses operate in industries where a couple of businesses essentially dominate.
Frequently Asked Questions
  1. Does Netspend Accept Wire Transfers?

    Find out how Netspend cardholders can arrange for electronic transfers to add money to their Netspend prepaid debit cards ...
  2. What is Operations Management Theory?

    Historical and modern operations management theory can be used to benefit businesses.
  3. What's a Typical Day for Someone in M&A?

    Financial professionals in M&A have a very specialized role. Check out their typical duties.
  4. Is There a Difference Between the Equity Market and the Stock Market?

    The terms equity market and stock market are synonymous
Trading Center