Economics Online

Monopoly

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Monopoly – definition

A pure monopoly means a single seller with no competitors. Given that ‘pure’ monopolies are rare, regulators and other agencies often consider the extent of monopoly power in a market to determine whether intervention should take place.

Monopoly power is the extent to which a firm can influence and even ‘set’ the market price or influence the quantity supplied to the market, and also the extent to which conditions of business are influenced by a single firm.

Here, a monopolist is a price maker and faces a downward sloping demand curve. Although maximising profits would occur at the output where MC = MR, the firm can make super-normal profits over the whole range between A and B – given that AR is above ATC over this range.

When faced with the threat of a potential entrant a monopolist could even drop price below P1 to deter entry. Furthermore, the monopolist can reduce price to just below the average cost of potential entrants, and limit entry – a practice called ‘limit pricing’.

In terms of monitoring and controlling mergers, monopoly power can result from a merger between two or more dominant firms leading to a ‘substantial lessening of competition’.

A complex monopoly is a situation where a number of firms act as though they were a single firm – for example, by jointly raising prices at the same time.

A legal  monopoly is a firm that is granted monopoly status by a government. 

A natural monopoly is a firm which owns a single infrastructure, such as a gas or electricity provider, although several firms may operate services which use the single infrastructure.