What is monopoly in economics

Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is a Monopoly? Understanding a Monopoly. Types of Monopolies. Breaking Up Monopolies. Key Takeaways A monopoly consists of a single company that dominates an industry. A monopoly can develop naturally or be government-sanctioned for particular reasons.

However, a company can gain or maintain a monopoly position through unfair practices that stifle competition and deny consumers a choice.

What Are Some Characteristics of Monopolies? What Is a Natural Monopoly? A natural monopoly may exist without practicing any unfair machinations to stifle competition.

Why Are Monopolies Unfair? In , two additional pieces of antitrust legislation were passed to help protect consumers and prevent monopolies: The Clayton Antitrust Act created new rules for mergers and corporate directors. It also detailed the types of practices that would violate the Sherman Antitrust Act. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Clayton Antitrust Act The Clayton Antitrust Act is designed to promote business competition and prevent the formation of monopolies and other unethical business practices.

What Is a Gorilla in Business? The term "gorilla", in business, refers to a company that has managed to dominate an industry or sector without necessarily achieving a monopoly. Antitrust Laws: Keeping Healthy Competition in the Marketplace Antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing.

What Is a Price Maker? A price maker is an entity that has the power to dictate the price it charges because there are no perfect substitutes for the goods it sells. Partner Links. Related Articles. Investopedia is part of the Dotdash publishing family. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Sources of power include:. Monopolies and competitive markets mark the extremes in regards to market structure. There are a few similarities between the two including: the cost functions are the same, both minimize cost and maximize profit, the shutdown decisions are the same, and both are assumed to have perfectly competitive market factors.

However, there are noticeable differences between the two market structures including: marginal revenue and price, product differentiation, number of competitors, barriers to entry, elasticity of demand, excess profits, profit maximization, and the supply curve.

Privacy Policy. Skip to main content. Search for:. Introduction to Monopoly. In a study of thousands of bond issues, after correcting for size and safety and other characteristics of each issue, Kessel found the pattern of underwriter spreads to be as shown in Table 2. For twenty or more bidders—which is, effectively, perfect competition—the spread was ten dollars. Merely increasing the number of bidders from one to two was sufficient to halve the excess spread over what it would be at the ten-dollar competitive level.

Thus, even a small number of rivals may bring prices down close to the competitive level. If a society wishes to control monopoly—at least those monopolies that were not created by its own government—it has three broad options. The first is an antitrust policy of the American variety; the second is public regulation; and the third is public ownership and operation.

Like monopoly, none of these is ideal. The defendants who also face hundreds of private antitrust cases each year probably spend ten or twenty times as much.

Moreover, antitrust is slow moving. It takes years before a monopoly practice is identified, and more years to reach a decision; the antitrust case that led to the breakup of the American Telephone and Telegraph Company began in and was under judicial administration until Public regulation has been the preferred choice in America, beginning with the creation of the Interstate Commerce Commission in and extending down to municipal regulation of taxicabs and ice companies.

Yet most public regulation has the effect of reducing or eliminating competition rather than eliminating monopoly. A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. The merits of laissez-faire rest less on its famous theoretical foundations than on its advantages over the actual performance of rival forms of economic organization. The reason is that multiple firms cannot fully exploit these economies of scale.

Many economists believe that the distribution of electric power but not the production of it is an example of a natural monopoly.

The economies of scale exist because another firm that entered would need to duplicate existing power lines, whereas if only one firm existed, this duplication would not be necessary. And one firm that serves everyone would have a lower cost per customer than two or more firms.

Whether, and how, government should regulate monopoly is controversial among economists. Most favor regulation to prevent the natural monopoly from charging a monopoly price. Other economists want no regulation because they believe that even natural monopolies must face some competition electric utilities must compete with home generation of wind power, for example, and industrial customers can sometimes produce their own power or buy it elsewhere , and they want the natural monopoly to have a strong incentive to cut costs.

Besides regulating price, governments usually prevent competing firms from entering an industry that is thought to be a natural monopoly. A firm that wants to compete with the local utility, for example, cannot legally do so. Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway.

If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense. The late George J. Stigler was the Charles R.