A monopoly is a supplier of a product or service that has no competitors – it is the sole provider in a market. Some people also include a market with just two or three suppliers – but that is not a ‘pure monopoly’.
The word monopoly may refer to the situation in which there is only one supplier of a product or a service, or the supplier itself.
Not to be confused with a monopsony, which relates to a single buyer of a product or service with many sellers – for example, the only buyer of fighter jets is the country’s air force. The United States, UK, France, Israel and Russia have many defense companies but just one buyer in their home country – the government (the military). Even defense suppliers that export generally have just one client in each nation.
A monopoly is a market structure with just a single seller who sells a unique product, faces no competition, and determines its price.
Governments try to prevent monopolies
In most advanced economies and many emerging economies, monopolies are forced to divest assets to satisfy anti-monopoly (anti-trust) laws. These laws came into force to protect consumers and prevent companies from gaining total control of a market.
Mergers and acquisitions are strictly regulated in Europe, North America, Japan and Australasia; the aim being to make sure no single supplier becomes too dominant in a market. Companies can still meet consumer demand without creating a monopoly.
Believing that monopolies are examples of extreme cases of capitalism is a myth. In centrally-controlled economies, monopolies are much more common. During the Soviet communist era and North Korea today, many more sectors had/have just one supplier compared to any capitalist economy.
Conditions where a monopoly exists
For a monopoly to exist, several of the conditions/situations below occur simultaneously:
– Just one seller exists for a good or service.
– There are no substitutes or close substitutes for the good or service sold by the monopolist.
– The monopolist is protected by hurdles – obstacles to competition – that make it virtually impossible for others to enter the market.
– Virtually total control of market price. If the monopolist controls the available supply, it can control how much people have to pay for it.
Pure monopoly vs. monopolistic competition
When there is just one supplier – one company that has control over a specific product and no competitors – it is called a pure monopoly.
In a pure monopoly, the company completely controls the price, and can easily block competitors from entering the market. In fact, there is sometimes legislation preventing others from entering the market in that area.
An example of a pure monopoly is the state-owned CFE (Comisión Federal de Electricidad) in Mexico, which supplies people across the country with electricity. By law, nobody else is allowed to generate power and sell it directly to the public in Mexico.
When a handful of firms have control over a specific product or service, it is called monopolistic competition. In such situations, there are substitutes for a product and each producer has less control over its price, which is more determined by market forces (supply and demand).
An example of monopolistic competition are the soft drinks companies Coca-Cola and Pepsico. The differences between their products have more to do with perception. How a Coke or Pepsi, Fanta or Crush, or 7-up or Sprite are presented sets the tone for which one becomes the market leader.
Technically, a situation in which just two suppliers dominate the market for a commodity or service is called a duopoly. A duopoly is the most basic form of oligopoly – a market dominated by a very few companies.
Monopoly is also the name of a famous board game in which the players try to gain a monopoly of real estate by advancing around a board and buying train stations, well known streets and utility companies, and charge rent on those who land on their properties.
“When a single supplier, helped by various *barriers to entry, controls the market for a particular good or service, thus benefiting from the freedom to set prices and quality levels without the pressure of competition.”
* Barriers to entry are obstacles that startups and other firms have to face when trying to break into a new market.
Video – What is a monopoly?
This Investors Trading Academy video explains what a monopoly is.