A monopoly is a market structure in which one seller supplies all output of a good or service. In the standard economic model, buyers lack close substitutes and competitors face substantial barriers to entry. These conditions give the seller market power: the ability to influence price rather than accept a competitively determined price. Monopoly is an important subject in microeconomics, although legal definitions of monopoly power need not require literally exclusive supply. (openstax.org)
Definition and market boundaries
Identifying a monopoly requires defining the relevant product and geographic market. A seller’s position depends on the alternatives available to customers: control of one narrowly described product does not necessarily imply control over a broader market containing effective substitutes. Competition authorities therefore examine customer substitution, market shares, entry conditions, and the durability of a firm’s position rather than treating size alone as decisive. (ftc.gov)
Monopoly differs from oligopoly, where a few major sellers compete, and monopolistic competition, where numerous firms offer differentiated products. It also differs from perfect competition, whose firms individually lack power over market prices. These categories describe different competitive conditions; product differentiation or a large market share does not automatically establish monopoly. (openstax.org)
Origins and barriers to entry
Barriers to entry are legal, technological, or economic conditions that prevent or discourage competing suppliers from entering a market. Without effective barriers, unusually high profits can attract entrants and undermine exclusive supply. Barriers may arise from production costs, control of essential resources, legal privileges, or conduct that excludes rivals. (openstax.org)
A natural monopoly occurs when one supplier can serve market demand at lower total cost than multiple suppliers. Economies of scale can produce this condition when average costs decline across the relevant output range. Networks involving expensive, difficult-to-duplicate infrastructure, such as local water distribution, illustrate why duplicating facilities may increase costs rather than improve productive efficiency. (openstax.org)
Legal exclusivity can also restrict competition. A patent, for example, grants time-limited rights over an invention and forms part of intellectual property protection. Such rights can encourage invention by allowing returns to its creator, but exclusivity over an invention does not necessarily eliminate competing products. Separately, control of a critical physical resource can obstruct rival supply. (openstax.org)
In digital markets, network effects can reinforce incumbent advantages: a service becomes more valuable as participation grows. Combined with scalability and related cost advantages, these effects can create entry obstacles. Their competitive significance depends on market conditions; network effects alone do not establish that a monopoly exists. (oecd.org)
Output, price, and profit
A monopolist cannot independently choose any price and any sales volume. Its choices are constrained by demand: a higher price generally reduces the quantity customers purchase. Under uniform pricing, expanding sales ordinarily requires reducing the price on existing sales as well as attracting additional buyers. Consequently, marginal revenue—the additional revenue from another unit—is below price when demand slopes downward. (openstax.org)
In the standard profit-maximizing model, an interior optimum occurs where marginal revenue equals marginal cost, provided the relevant maximum conditions hold. The firm then obtains its price from the demand curve at that output. Monopoly power does not guarantee profit: if average total cost exceeds the achievable price, the firm incurs losses despite being the only supplier. (openstax.org)
Welfare and price discrimination
Compared with a competitive benchmark using the same demand and cost conditions, an unregulated, uniform-price monopolist generally produces less and charges more. Some consumer surplus is transferred to the producer, while some mutually beneficial transactions do not occur. The latter create deadweight loss, distinct from the redistribution associated with higher prices. This output restriction is a standard source of market failure. (openstax.org)
These conclusions depend on the pricing model. Price discrimination means charging different prices for reasons not explained solely by corresponding cost differences. It requires market power, a way to distinguish willingness to pay, and constraints on resale. Group pricing and quantity-based pricing can change both output and the distribution of gains; their welfare effects are not uniformly positive or negative. (open.oregonstate.education)
Under the idealized case of perfect price discrimination, a seller charges each buyer’s willingness to pay for each unit. Output can reach the efficient benchmark while the seller captures the surplus otherwise available to consumers. This separates allocative efficiency from distribution: eliminating the usual monopoly deadweight loss does not imply that buyers receive the gains from exchange. (open.oregonstate.education)
Competition law and regulation
Competition law distinguishes possession of market power from prohibited conduct. In the United States, monopoly obtained through superior products, innovation, or business skill is not itself unlawful. Monopolization analysis instead examines whether durable monopoly power was acquired or maintained through exclusionary conduct. Practices such as exclusive dealing, tying, or predatory pricing require analysis of their competitive effects and justifications; their labels alone do not determine liability. (ftc.gov)
Natural monopoly presents a different policy problem because dividing supply among competitors may sacrifice cost advantages. Economic regulation can constrain prices or returns while preserving a single network. Marginal-cost pricing may leave a supplier unable to recover fixed costs; average-cost pricing permits cost recovery but does not achieve the same output benchmark. Cost-plus regulation can weaken incentives to reduce expenditure, whereas price-cap regulation seeks to preserve such incentives, subject to the difficulty of choosing and updating an appropriate cap. (openstax.org)