Monopoly

In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a market situation where there is only one provider of a product or service. The term should be contrasted with monopsony where there is only one buyer. A monopoly is characterized by a lack of competition, lack of viable substitutes for the traded good or service, and high barriers to market entry for potential competitors. For example, the monopolist may control a valuable input (such as unique natural resource), or may control some unique intellectual property.

Large corporations often attempt to monopolize markets through horizontal integration tactics, in which they control many small, seemingly diverse companies to create the illusion of competition. A magazine corporation, for example could publish many different magazines on many different subjects, but would still be practicing monopolistic tactics if intent of doing this was to contol the entire magaize-reader market, and prevent the emergence of any competiting companies.

The word is also often used for companies that do have competition, but which have a large market share and use their size to compete in ways which are considered unfair, such as dumping products below cost to harm competitors, creating tying arrangements between their products, and other practices regulated by Antitrust law.

The term "natural monopoly" is sometimes used to describe monopolies that come about because production conditions make a single provider most efficient. A "state monopoly[?]" is a provider that is unique because the law explicitly forbids competition.

Monopolies will generally charge a higher price for their products and sell less compared to the situation in a competitive market in order to maximise their profits. This will typically lead to an outcome which is inefficient in the sense of Pareto efficiency. It is also often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they don't have to be efficient or innovative to compete in the marketplace.

Sometimes, though, this very loss of efficiency can raise the potential value of a competitor enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives.

When monopolies are not broken through the open market, often a government will step in to either regulate the monopoly, or forcibly break it up (see Antitrust law). Public utilities in many locations are an example of the first one. AT&T is a good example of the latter. When it was broken up into the "Baby Bell" components, MCI (a former part of AT&T), Sprint (later merged) and others came into the phone market and started to take phone traffic from the less efficient AT&T.

In economics a company is said to have monopoly power if it faces a downward sloping demand curve (see supply and demand). This is in contrast to a price taker that faces a horizontal demand curve. A price taker can not choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell more.

If a monopoly can only set one price it will set it where marginal cost (MC) equals marginal revenue (MR) as seen on the below diagram. This can be seen on a supply and demand diagram for the firm. This will be at the quantity Qm and at the price Pm. This is above the competitive price of Pc and with a smaller quantity that the competitive quantity of Qc. The profit the monopoly gains is the shaded in area labeled profit.

As long as the price elasticity of demand (in absolute value) for most customers is less than one, it is very advantageous to increase the price: the seller gets more money for less goods. With an increase of the price the price elasticity tends to rise, and in the optimum mentioned above it will for most customers be above one.

See also: government-granted monopoly, Microsoft antitrust case, market forms, Committee of Fifty, Oligopoly, Price discrimination.

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