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What is a Monopoly?

Definition: Monopoly is the market condition where a single supplier dominates the market for a given product. In other words, you can only buy a product from one company. No other company competes with them in that space.

What Does Monopoly Mean?

What is the definition of monopoly? The product has no substitutes; therefore, consumers are forced to purchase it from the monopoly. Unlike perfect competition, the monopoly determines the level of prices, which are usually above its marginal cost.

The key principle for determining the selling price is profit maximization. The monopoly has two options: either to determine the price and see how much quantity consumers can absorb at this price, or to determine the quantity produced and see at what price it can be absorbed by consumers. Nevertheless, the selling price should sustain the maximum difference between total cost and total revenues. As soon as maximization is achieved, the monopoly is at equilibrium. This means that it can meet consumer demand while maximizing its profits, but this is not likely.

Letís look at an example.

Example

Although monopolies do not face competition, they can use advertising to increase the total demand for its product and improve their public image in order to avoid governmental intervention for restriction of monopolistic power. In lack of competition, a monopolies raise prices without notice, delay investments, and often provide an inferior quality of service. From a consumer perspective, the lack of competition deprives consumers of a negotiating power, forcing them to rely on whatever product is available from the monopolies. The role of the government and anti trust laws are to foster competition and increase consumer alternatives through a structured public policy.

A typical example of natural monopolies is the utilities companies, including telecoms, oil, gas, electricity and water companies. Some telecom companies like AT&T in the U.S., Deutsche Telekom in Germany and OTE in Greece used to be strong monopolies because of their unique technology and operating conditions that restricted the existence of competitive companies in the industry. Today, Comcast Corporation in the U.S. is a strong monopoly in the cable industry. Other examples include Microsoft in the software and technology industry and Google in the search engines.

Examples in The News

"Giving a drug company a monopoly where it charges what it can is like negotiating firefighters' pay when they show up at your burning house." - NY Times

Summary Definition

Define Monopolies: Monopoly means one company disproportionately owns more market share than any other company in an industry and thus has no competition.

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