Business Monopoly Overview, Impact & Examples | What is a Monopoly? | Study.com

Types of Monopolies

There are several different types of monopolies and monopoly-market structures that can exist. Each type has different characteristics and implications for the various level of competition, market efficiency, and consumer welfare.

Monopolistic Competition

Monopolistic competition is a market structure that has many firms producing similar but slightly distinguished products. In economic theory, monopolistic competition exists somewhere between perfect competition and monopoly. It is less competitive than perfect competition but more competitive than a monopoly should be. There are several important features of the monopolist competition structure:

• Many firms: There are many firms in the market, each with a portion share of the market. The important thing here is that no single firm has complete control over the market.
• Similar yet distinct products: The products offered by the firms are similar but not identical. They may be differentiated by brand name, packaging, or other factors.
• Low barriers to entry and exit: There are low barriers to entry and exit, so firms can easily enter or exit the market.
• Advertising and other forms of marketing: Firms engage in advertising and marketing to differentiate their products from others and to attract customers.
• Pricing: Prices are set by each firm individually. Firms may have some influence over prices in the market as a whole, but they cannot completely control prices.

Examples of monopolistic competition include many retail businesses, such as clothing stores, restaurants, and hair salons.

Natural Monopoly

A natural monopoly is a market structure in which one firm is able to produce a good or service at a lower cost than any other two or more firms due to some innate aspect of the firm, specific market, or industry conditions. Natural monopolies do not occur from the actions of governments or rivals but instead typically ensue from the conjunction of productive technologies, economies of scale, and market demand. Common examples of natural monopolies include public utilities, such as water and electricity, which often have high fixed costs for infrastructure that other firms cannot easily replicate. These high fixed costs give the existing firm a cost advantage over any potential new entrants, making it very difficult for other firms to compete. As a result, the existing firm effectively becomes a monopoly. Other examples of natural monopolies include Google, Amazon, Meta, and Microsoft.

Natural monopolies can provide wider reach for consumers (such as geographically) and greater efficiency, which often results in lower consumer prices. On the downside, natural monopolies can lead to higher prices if the firm is not regulated, or they inhibit innovation and competition, which may result in poorer customer service.

Public Monopolies

Public monopolies are created and sustained by government action, and they can be either natural or artificial. Government usually regulates public monopolies in order to protect consumers from exploitation by ensuring that the monopoly does not abuse its power. Examples of public monopolies include utilities such as water, electricity, and gas; public transportation systems; and postal services that are either state-run or have some form of heavy government regulation.

Pure Monopoly

The term pure monopoly refers to a market structure with a single firm producing all the market output. The firm is the sole producer of the goods or services, and there are no other substitutes. Examples of pure monopolies include Microsoft (Windows) in the software market and the United States Postal Service (USPS). A pure monopoly has significant barriers to entry, which may be economic, legal, or technological. They are characterized by the following:

• Single firm: There is only one firm in the market that produces a good or service with no close substitutes.
• Barriers to entry: There are significant barriers to entry that make it nearly impossible for other firms to enter the market and compete.
• Monopoly power: The firm has complete control over the market and can set prices at whatever level it chooses.

Monopoly Impact

There are several impacts that monopoly economics can have on both the market and consumers. One common impact is that they can lead from the controlling firm to having complete power in the market price. Since there are no close substitutes and other firms are unable to enter the market, the monopolist firm can charge whatever price they want. This can have several possible outcomes, including consistent pricing or the setting of arbitrarily high prices.

Another common impact and feature of monopolies are related to economies of scale. Since the monopolist firm is the only producer in the market, they are typically able to produce at a much lower per unit cost than if there were multiple firms in the market. This has the potential to offer consumers lower prices, but it also gives the monopolist firm a greater degree of power and control over the market. Monopolies can also lead to creating artificial scarcity in a market. By limiting the supply of a good or service, monopolist firms can create a shortage in the market. This can lead to higher prices and less availability of a good or service for consumers.

Monopoly Regulation

The US federal government has anti-trust laws in place to protect consumers from monopolies. These laws are designed to promote competition and prevent firms from unfairly using their monopoly power to exploit consumers. Some of these laws include the Sherman Antitrust Act of 1890, the Federal Trade Commission Act of 1914 and the Clayton Antitrust Act of 1914. They attempt to do this by outlawing anti-competitive practices, such as price fixing, collusion, and monopolization. The Federal Trade Commission (FTC) is the primary agency responsible for enforcing anti-trust laws in the US. The FTC investigates potential monopolies and takes action if it finds any violation of the law. The FTC can take a number of different actions, including filing lawsuits, imposing fines, and ordering the breakup of a monopoly.

Monopoly Examples

It can be useful to explore a few monopoly examples in order to understand how this type of market structure can be seen in modern times.

• Google: Google is a monopoly in the online search market. As of July 2022, Google had over 83.84% of the worldwide market share of the desktop search engine, while its closest competitor, Microsoft Bing, had only 8.8%. Google’s monopoly power can be attributed to several factors, including its strong branding, high customer satisfaction, network effects, and barriers to entry.
• Microsoft: Microsoft is a monopoly in the market of desktop operating system software. As of August 2022, it had over 74.73% of the market share with its Windows operating system, while its closest competitor, Apple’s OSX, held only 14.4%. Microsoft’s monopoly can be attributed to a number of factors, including its early entry into the market, the proliferation of personal and business computers running Windows, and the high switching costs associated with changing operating systems.

Lesson Summary

A monopoly is a market structure where a single firm dominates the production or sales of goods or services within a market, resulting in high barriers to entry for other potential competitors. There are several different types of monopoly structures:

1. Monopolistic competition is a form of market structure where many firms produce similar products but with slight variations.
2. Natural monopolies emerge when a single firm can produce a good or service at a lower cost than any other two or more potential competitors due to its economies of scale, production technologies, and market demand.
3. Public monopolies are monopolies that are either established themselves or granted to external entities through state action.
4. Pure monopoly is a market structure in which there is only one firm producing goods or services with no close substitutes.

The US federal government has enacted several anti-trust laws in order to protect consumers from monopolies. These laws are enforced and investigated by the Federal Trade Commission (FTC). They attempt to do this by outlawing anti-competitive practices, such as price fixing, collusion, and monopolization.