Monopoly

At the opposite extreme from perfect competition sits a market with a single seller and no rivals. That is monopoly, and the power it confers is the classic concern of competition policy.

A monopoly is a market structure in which a single firm is the sole supplier of a product with no close substitutes, giving it substantial power to set prices and restrict output. As the polar opposite of perfect competition, it is the textbook case of market power and its costs.

Power over price

The defining feature of a monopoly is that the single seller is a price maker, not a price taker. Facing no competition, the monopolist can choose to restrict output and raise the price above the competitive level, capturing higher profits. Unlike a firm in a competitive market, which must accept the market price or lose all its sales, a monopolist trades off price against quantity along the whole market demand curve, and the profit-maximising choice involves producing less, and charging more, than competition would deliver.

Why it is a problem

The harm of monopoly is not merely high prices and profits but inefficiency. By restricting output below the level where price equals marginal cost, a monopoly prevents some mutually beneficial trades from happening, creating deadweight loss, value destroyed for no one's benefit. It can also dull the incentive to innovate, improve, and cut costs, since a protected monopolist faces no competitive pressure to do so, and it transfers wealth from consumers to the monopolist. These costs are why monopoly power is the central target of competition policy.

When monopolies arise and persist

Monopolies arise and survive only where something keeps competitors out: high barriers to entry, control of an essential resource, network effects, economies of scale so large that one firm supplies most cheaply, a natural monopoly, or legal protection such as a patent. Where entry is easy, monopoly profits attract rivals who compete them away, so a durable monopoly requires durable barriers. Some monopolies are granted or tolerated deliberately, through patents that reward innovation or regulated utilities where competition would be wasteful.

Monopoly is the benchmark case of market power, the structure in which a single firm's control over supply lets it raise prices, restrict output, and earn profits at the expense of efficiency. Understanding it, why it harms, when it arises, and what sustains it, is the foundation of the competition policy that aims to limit it.