Monopoly
A monopoly is a market structure in which a single seller supplies a product for which there are no close substitutes, and in which barriers to entry prevent other firms from competing. A monopoly firm is a price maker, meaning it can influence the market price through its output decisions.[1]
Definition
A monopoly exists when one firm is the sole producer of a good with no close substitutes and there are significant barriers to entry. Barriers to entry may include legal protections (patents, licences), control of a key resource, or economies of scale so large that a single firm can supply the market at the lowest cost (a natural monopoly).[1]
Profit maximisation
A monopoly maximises profit by producing the quantity at which marginal revenue equals marginal cost, then charging the price the market will bear at that quantity. Because the monopolist faces a downward-sloping demand curve, marginal revenue is less than price, and output is lower and price higher than under perfect competition. This results in a deadweight loss—a reduction in total social welfare.[1]
Comparison with competition
| Feature | Perfect competition | Monopoly |
|---|---|---|
| Number of sellers | Many | One |
| Price determination | Price taker | Price maker |
| Long-run output | Efficient | Below efficient level |
| Deadweight loss | None | Present |
Regulation and policy
Because monopolies restrict output and raise prices, governments regulate them through competition policy (antitrust law), price regulation, and public ownership. Regulation aims to limit market power while preserving incentives for efficiency and innovation. Natural monopolies—such as water and electricity distribution—are often regulated rather than broken up, because duplication of infrastructure would be wasteful.[1]