Monopoly refers to a type of market structure in which a single company and its goods and services dominate the market at all times. In other words, consumers are forced to buy the product only from a single supplier due to a lack of competition for the supplier from other market players. The product or service in this context could refer to all kinds of goods, supplies, commodities, infrastructure, or assets.
Monopolies can be considered as an extreme form of free-market capitalism where there are no restrictions or restraints of any sort on a particular company, that it becomes so huge and controls all or nearly all of the market. They have an unfair advantage over other suppliers, either due to the fact that they are the only provider of the product or service, or they control the market share or both.
Although they can exist for any product or service, monopolies can usually be seen in essential goods or services – products or services which consumers cannot do without – such as utilities (gas, electricity, water, etc.). In fact, all monopolies possess certain similar characteristics which differentiate them from the rest of the competition
High Barrier to Entry
Sometimes a company has such a strong foothold over the market share for a product that other players are unable to enter the market. A company also becomes a monopoly by acquiring or killing its competition. Other barriers of entry could be technological superiority, high capital outlay requirements, economies of scale, superior distribution network, and cost advantages.
For instance, a monopolistic player might be able to achieve better economies of scale in producing the product due to its technological superiority or superior distribution network, and then sell its product at such low prices that its competitors might not survive the price onslaught and eventually close down, or get acquired by the monopoly player.
A company becomes a monopoly by becoming the only supplier of a product or service. With no other market player available to supply the good or service, consumers have no choice but to buy the product or service from the monopoly.
Price Inelastic Demand
As soon as it becomes the only supplier of the essential good or service, the monopoly has the freedom to determine the price of the product or service at its discretion without the need to worry about demand. Usually, monopoly players enjoy price inelastic demand, which means that the demand for the product does not increase or decrease based on the price.
An example of price inelastic demand would be gasoline prices. Irrespective of whether the gasoline prices are higher or lower, consumers have to fuel up their cars. Just because the gasoline company increased the price on a particular day, we are not going to stop refueling our gas tanks. The gasoline company knows this and tries to maximize its profits by increasing the prices so long as it is able to fulfill the demand for gas.
Moreover, it can increase the price of the product with little or no interference from market players and other external factors.
Lack of Substitutes
A company becomes a monopoly when it sells a product for which there is no substitute. Lack of substitutes makes the demand for the product relatively inelastic. Monopolies take full advantage of such price inelasticity to maximize their profits
Monopolies can exist in various forms. A supplier who happens to be the only seller of a product or service that has no other close substitutes in the market is a pure monopolistic player. More often than not, a pure monopoly exists only in theory because it can exist only in a free economy where no government regulations exist. It is generally very difficult to see real-life examples of pure monopoly because governments do not encourage that practice and impose some kind of regulation to protect the consumer.
For a long time, Microsoft happened to be the only provider of computer software and operating systems. When the United States government acquired proof that Microsoft was using its position to intimidate suppliers, it forced Microsoft to open up its technology to the market. This helped Microsoft’s competitors to develop competing products which eventually eroded Microsoft’s market share.
Another example of an almost pure monopoly is the search engine Google, which accounts for more than 90% of all internet searches.
Monopolies can also happen if government regulations help them to gain complete market share. This is usually in the case of utilities. For instance, a local government’s decision to award the electricity utility service to one supplier makes economic sense considering the high cost of building and maintaining power plants, and distribution of electric supply across the area.
The disadvantages of a monopolistic market structure outweigh its advantages. While a monopolistic structure can ensure consistency in the delivery of an expensive product or service, as is the case with utilities as mentioned above, the limitations include the problem of price-fixing where the monopoly might take unfair advantage of its position to fix a higher price to the detriment of consumers. This kind of rampant price increase might even lead to inflation as it pushes up consumer spending. Moreover, monopolies can cause a decline in product quality and eliminate the incentive for innovation. A monopolistic player might not care about customer satisfaction, as they know that consumers do not have any other choice but to depend on them for the supply of the good or service. This kind of complacent attitude kills innovation as there is no incentive to produce better quality products or services.
To sum up:
- Monopoly is a type of market structure in which a single company and its goods and services dominate the market at all times.
- Some of the major characteristics of a monopoly market include the presence of a single seller, high entry barriers, price inelastic demand, and lack of substitutes
- Monopoly ensures a continual supply of an essential product or service
- Monopolies can result in price-fixing, inflation, declined product quality, and lack of innovation.