What Is A Monopoly?
By Ted Rollins
, last updated September 5, 2011
More than just the inspiration for an extremely popular board game, a monopoly is an entity that is the only supplier of a commodity. Due to this control of a market, a monopoly is typically characterized by a lack of competition that leads to higher prices than would otherwise exist were there more competition. In the United States, there are laws that prevent certain types of monopolies from existing, with the intended goal of protecting consumers. In the following, you'll learn more about the ways that monopolies work.
Every monopoly has a set of characteristics that define it as such. Monopolies are price makers in their given markets, as they can completely determine their own prices due to a lack of competition. In this same vein, monopolies will always maximize profits. Due to high barriers of entry, potential competitors are incapable of entering the market, and thus as the single seller of the good, a monopolist is often consider to be interchangeable with the entire industry.
Without barriers to entry, a monopoly would not exist, as it derives its power from the inability of competitors to enter the market. There are considered to be three major types of barriers to entry that stop competition and encourage monopolization: economic barriers, deliberate barriers and legal barriers.
Economic barriers are the strictly financial reasons why competition is impossible. One such reason is economies of scale; this means that due to the large amount of a product produced by the monopoly, the cost for producing an additional item is much lower than the cost for a new supplier to enter the market and make the same or a similar item. In certain fields, it takes a large amount of capital to enter into competition before anything is even produced, such as in the field of drilling or oil exploration. There may also just be no other product that can substitute for the function of the monopolized item.
The second barrier to entry has to do with actions taking by the monopoly to prevent competition. These types of actions are heavily regulated against by the government, and include collusion with other businesses, government lobbying and other anti-competitive processes like dumping, which occurs when a company sells a product at a loss in order to force other competitors out of the market. These types of concerns are closely aligned with legal barriers to competition. However, some legal barriers actually encourage monopolization rather than discourage it. The most important example of this is intellectual property law. In most examples, a company acquires an exclusive patent on a product and thus is the only entity that can produce and sell it for some period of time, leading to a situation in which it can set its own price without any competition. Due to these sorts of barriers of entry, it's both in the interest of citizens and the government to discourage monopolization, as it leads to fewer businesses and more expenses for the everyday consumer.