Monopolies

Monopolies are market structures in which a single firm supplies a good or service with no close substitutes, giving it substantial control over price and output. In a monopoly, the firm faces little or no competition, and price-taking behavior of a competitive market does not apply. Monopolies are not inherently illegal; they can arise from natural conditions or public policy, and some persist due to high barriers to entry.

Barriers to entry include economies of scale that make a single firm more efficient, control of essential resources, network effects, and legal protections such as patents or exclusive licenses. Government-granted monopolies, geographic isolation, and strategic actions that deter rivals can also create market power. Natural monopolies occur when average costs decline over the relevant range of output, so one provider can serve the entire market at lower cost than multiple firms.

The presence of monopoly tends to raise prices and reduce output relative to competitive benchmarks, potentially causing deadweight loss and lower consumer welfare. However, some monopolies may encourage investment in large-scale projects or innovation when profits are protected by barriers, though this outcome is not guaranteed and depends on regulation and market dynamics. Policy responses may include antitrust enforcement, price regulation, or public ownership, with the goal of preserving competitive pressures without compromising essential services.

Economists measure market power using tools such as the Lerner index, which compares price to marginal cost, and concentration indices like the Herfindahl-Hirschman Index. Historical cases such as Standard Oil, the pre-1984 AT&T monopoly, and De Beers are frequently cited in discussions of monopolies and policy debates today.