Politics & Society

Economics 101: What Is a Monopoly?

Written by MasterClass

May 31, 2019 • 4 min read

When only one company controls an entire industry—or even a sizeable percentage of that industry—the company is said to have a monopoly. Traditionally, monopolies benefit the companies that have them, as they can raise prices and reduce services without consequence. However, they can harm consumer interests because there is no suitable competition to encourage lower prices or better-quality offerings.

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What Is a Monopoly in Economics?

The purest form of a monopoly is one in which a single entity controls all of a particular industry. But from an antitrust perspective, even a company controlling 25% of an industry can be considered monopolistic.

What Are the Key Characteristics of a Monopolistic Market Structure?

Monopolies can be identified by the following characteristics:

  • A lack of competition within a market. For instance, a regional airport that’s only served by a single airline.
  • A lack of substitutes. For instance, a company store in a factory town with no other retail within a ten-mile radius.
  • Price changes without recourse. A monopolist effectively sets the price within a market. Because there are no competing products offering a different price, the monopolist has effectively set the rate for the entire industry.
  • Barriers to entry for competitors. A combination of government regulations, pre-existing contracts, and insurmountable price factors make it impossible for a competitor to enter the market. Many municipal cable TV operators benefit from massive barriers to entry for potential competitors. Without new entrants into a market, a monopoly cannot be broken.

How Do Monopolies Form?

Many monopolies form via the mergers of rivals, or by a large company buying out its smaller competitors. This occurred in the American aircraft industry, which for years was characterized by a rivalry between Boeing and McDonnell Douglass. Eventually, Boeing purchased McDonnell Douglass, making it the only American manufacturer for the most coveted models of commercial aircraft.

Other times, monopolies form after large corporations stifle their rivals via price wars. In many municipalities, large retailers like Walmart were able to successfully undercut small retailers on price until eventually, the smaller retailers closed down. This afforded Walmart and similar stores a monopoly over a regional retail economy.

What Are the Advantages Of A Monopoly?

Monopolies are commonly thought to be negative for all parties except shareholders in the monopolistic company itself. However, there are a small number of benefits that can positively affect everyone in a monopolistic marketplace. They are:

  • Stability of prices. In the absence of competition, there are no price wars that might rattle markets. Other companies and end-user customers who do business with a monopolistic company may enjoy certainty at the prices they will pay.
  • The ability to scale up. Monopolies can lead to large economies of scale. A company that holds a monopoly on a certain type of product may be able to produce mass quantities of that product at lower costs per unit. Depending on the ethics of the company, those low prices may be passed along to the consumer.
  • Budgets for research and development. A monopoly that feels confident about its market standing is more likely to feel safe investing in research and development. This can lead to new products and manufacturing efficiencies that may benefit consumers down the line. The pharmaceutical industry offers an example of this.

What Are the Disadvantages Of A Monopoly?

Despite the stability that monopolies often bring, they are typically regarded as a net negative for consumers. The biggest reasons for this are:

  • Increased prices. When a single firm serves as the price maker for an entire industry, prices typically rise. Airports served by a single airline face the negative price consequences of a single seller’s market power. In general, the closer to a pure monopoly within an industry, the higher the average price of goods and services for a consumer.
  • Inferior products. Monopolistic firms have minimal incentive to improve the quality of the goods and services they provide. If you’re dissatisfied with your cable company, you may have little recourse apart from foregoing TV altogether. This is because, in most municipalities, one single cable vendor enjoys a near or total monopoly on the market.
  • Price discrimination. A monopolistic company may find it easy to engage in price discrimination, where they charge different prices for different consumers. In a sports stadium, where all concessions are controlled by a single entity, the price of a hot dog may be $7 in the concourse, but $10 at your seat. An elderly fan who has trouble walking may have no choice but to pay the $10 for a hot dog at his seat, even though it’s the exact same type of hot dog that’s being sold for less to more able-bodied customers.

When and How Are Monopolies Broken Up?

In democracies such as the United States, governments have typically broken up monopolies when they determine that they are not acting in the interest of the citizens who serve as their customer base.

  • Antitrust law, some of it dating back to the nineteenth century, is the foundation for the government’s ability to dissolve monopolies.
  • One of the most famous cases of monopoly busting occurred with the breakup of AT&T, then known as the “Bell System.” This breakup was agreed to in 1982 and took effect on January 1, 1984. In more recent years, the U.S. government has looked more favorably on large corporations and has permitted numerous mergers in the transportation, telecom, and broadcast industries. Even the old AT&T companies have largely re-coalesced under both the AT&T and Verizon brand names.

Learn more about economics and society in Paul Krugman’s MasterClass.