A monopoly exists where there is only one supplier of a product or service. This allows the supplier to charge higher prices than if there was competition. There are degrees of monopoly and only the market in a commodity is completely free of monopoly pricing power.
What is usually meant by a monopoly is that there is no competition and therefore the supplier has a very high degree of pricing power. If there is no competition, the product being sold should have a price cross elasticity close to zero with any other product. As prices change, volumes sold follow the demand curve for the market; if prices rise, buyers either pay up or do without rather than switching to another supplier.
A market that falls short of monopoly but which also falls short of perfect competition is described as having monopolistic competition or imperfect competition.
Monopolies can arise in a number of ways including:
- Legally enforced monopolies on an entire market.
- Patents and copyrights: these create (usually very narrow) legally enforced monopolies on particular products or services.
- Natural monopolies: this includes many utilities where the cost of building a distribution network makes building more than one uneconomic.
- Cartels: agreements by former competitors to cooperate on pricing or market share; illegal in most countries.
- Network effects: these can both help create a monopoly and make it difficult to dislodge once established.
- Control of access to a market: e.g. if a retailer can buy up all the best sites for distributing a particular product in a particular area they can choke off the competition's access to customers.
It is clearly beneficial for a suppliers to try to reduce competition to their own products as far as possible, this may through differentiation of their products, building barriers to entry and deliberately exploiting network effects.
Most countries have anti-monopoly (often, especially in the US, called anti-trust) legislation to control the creation and abuse of monopolies and regulators empowered to enforce these laws. This has been fairly successful at stopping some types of abuses (such as the formation of cartels or the buy-out of competition) but has a more mixed record in dealing with network effects and ensuring access to markets.
Where the monopoly is one of buying rather than supplying, it is a monopsony.