Monopoly

A monopoly is a market in which a single firm is the only seller of a product or service that has no close substitutes, and in which barriers prevent new rivals from entering. Because the monopolist faces the whole market demand curve, it can choose its price instead of taking one from the market, and it typically charges more and sells less than a competitive industry would.

Pure monopolies are rare; in law and policy the term is often used loosely for a firm with a dominant share and lasting market power. Monopoly is the opposite end of the spectrum from perfect competition; its close relatives are duopoly and oligopoly on the selling side and monopsony on the buying side. Restricting the abuse of monopoly power is the core task of antitrust law.

Picture the only shop on a remote island. Islanders who want bread, batteries or petrol have nowhere else to go. The shopkeeper can raise prices and people will still buy, though some will go without. There is no rival across the road to keep prices in check.

The shopkeeper still cannot charge anything at all: at very high prices people buy less or do without. So the shopkeeper picks the price that earns the most, which is usually higher than a crowded market would allow. The difference between that price and a competitive one is the cost of monopoly to the islanders.

• Legal protection. Patents, copyrights and other intellectual property grant temporary exclusive rights; governments also grant exclusive licenses, as with many postal services, lotteries and the central bank's monopoly on issuing banknotes.
• Natural monopoly. Where economies of scale are so large that one firm can serve the whole market more cheaply than two, as with water pipes, power grids and rail track, a single supplier is the efficient outcome.
• Network effects. When a product becomes more valuable as more people use it, the leader can pull away from rivals; network effects explain the dominance of many platforms and payment networks.
• Control of a key resource. Owning the main source of a raw material, as the De Beers group did for much of the 20th century in rough diamonds, can block rivals.
• Strategic conduct. Exclusive contracts, predatory pricing and tying products together can keep competitors out, and these are the practices competition law targets.

A monopolist maximizes profit by producing where marginal revenue equals marginal cost. Because selling one more unit requires cutting the price on all units, marginal revenue is below price, so the monopolist produces less than a competitive industry. The markup it can sustain depends on the price elasticity of demand, summarized by the Lerner index:

• $L$ is the Lerner index of market power, between 0 (no power) and 1.
• $P$ is the price and $MC$ is marginal cost.
• $E_d$ is the price elasticity of demand the firm faces.

Worked example: if demand elasticity is $-2$, then $L = 0.5$, so price is set at twice marginal cost. With a marginal cost of $10, the profit-maximizing price is $20. If demand were more elastic, say $-5$, the markup would fall to $L = 0.2$ and the price to $12.50.

The output that is not produced because of the higher price is a deadweight loss: sales that would have benefited both buyer and seller never happen. Monopoly profit that is spent defending the position rather than improving the product is a form of rent-seeking.

Natural monopolies are usually regulated rather than broken up. Regulators cap prices (the United Kingdom's "RPI minus X" formula, introduced for privatized utilities from the 1980s, is a well-known example), limit the rate of return, or keep the network in public ownership through nationalization.

For other industries, competition law does not ban being a monopoly; it bans acquiring or keeping one through exclusionary conduct. Section 2 of the US Sherman Act prohibits monopolization, and Article 102 of the Treaty on the Functioning of the European Union prohibits abuse of a dominant position. Notable US cases include:

• Standard Oil (1911). The Supreme Court upheld the break-up of John D. Rockefeller's oil empire into separate companies.
• AT&T (1982–1984). A settlement with the Department of Justice split off the regional Bell telephone companies in 1984.
• Microsoft (2001). An appeals court upheld the finding that Microsoft unlawfully maintained its personal-computer operating-system monopoly, though it overturned the break-up order.
• Google search (2024–2025). A federal judge ruled in August 2024 that Google illegally maintained a monopoly in general search; remedies ordered in September 2025 barred exclusive distribution contracts and required some data sharing, but did not force a sale of Chrome.
• Meta (2025). In November 2025 a federal judge ruled that the Federal Trade Commission had not shown that Meta currently held monopoly power in social networking; the FTC said it would appeal.

Critics of monopoly point to higher prices, lower output, weaker incentives to innovate and political influence that can lead to regulatory capture. Defenders note that temporary monopoly profits reward invention, which is the logic of the patent system, and that firms often become dominant by offering better or cheaper products. Joseph Schumpeter argued that large firms with some market power fund much of the research behind creative destruction. The Chicago school added that monopolies without legal protection tend to be eroded by new entrants, while newer critics argue that digital platforms can entrench themselves for much longer.

• OpenStax Principles of Economics: How Monopolies Form
• US Department of Justice: Antitrust Division