What is a monopoly?
Definition:
Etymology: Latin monoplium, from Greek monoplion : mono-, mono- + plein, to sell; see pel-4 in Indo-European roots
Other forms: mo·nopo·lism (Noun), mo·nopo·list (Noun), mo·nopo·listic (Adjective), mo·nopo·listi·cal·ly (Adverb)
Tagalog: monopolyo
Latin: monopolium
French: monopole
Spanish: monopolio
In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it ...
(Source: en.wikipedia.org/wiki/Monopoly)
When one business or company dominates its area and squeezes out all its competition, the result is the consumer does not have a free choice, and inevitably the price of it's products or services will increase, and the 'Monopoly' increases it's profit. Although, sometimes prices stay low to discourage anyone from entering the market, profit still does occur. Not to be confused with a puremonopoly, where a company has control over the entire market for a product because of barriers to entry, a monopoly doesn't exist with complete control.
However, a monopoly is a philosophical process of direct competition leading to a puremonopoly, it is not in itself a purely dominating force. It is rather, the process of obtaining competitive grounds for a strive toward total control.
(Source: wiki.answers.com)
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.
(Source: http://moneyterms.co.uk)
Features of a Monopoly
When we discuss a monopoly, or oligopoly, etc. we're discussing the market for a particular type of product, such as toasters or DVD players. In the textbook case of a monopoly, there is only one firm producing the good. In a real world monopoly, such as the operating system monopoly, there is one firm that provides the overwhelming majority of sales (Microsoft), and a handful of small companies that have little or no impact on the dominant firm.
Because there is only one firm (or essentially only one firm) in a monopoly, the monopoly's firm demand curve is identical to the market demand curve, and the monopoly firm need not consider what it's competitors are pricing at. Thus a monopolist will keep selling units so long as the extra amount he receives by selling an extra unit (the marginal revenue) is greater than the additional costs he faces in producing and selling an additional unit (the marginal cost). Thus the monopoly firm will always set their quantity at the level where marginal cost is equal to marginal revenue.
Because of this lack of competition, monopoly firms will make an economic profit. This would normally cause other firms to enter the market. For this market to remain a monopolistic one, there must be some barrier to entry. A few common ones are:
Legal Barriers to Entry - This is a situation where a law prevents other firms from entering the market to sell a product. In the United States, only the USPS can deliver first class mail, so this would be a legal barrier to entry. In many jurisdictions alcohol can only be sold by the government run corporation, creating a legal barrier to entry in this market.
Patents - Patents are a subclass of legal barriers to entry, but they're important enough to be given their own section. A patent gives the inventor of a product a monopoly in producing and selling that product for a limited amount of time. Pfizer, inventors of the drug Viagra, have a patent on the drug, thus Pfizer is the only company that can produce and sell Viagra until the patent runs out. Patents are tools that governments use to promote innovation, as companies should be more willing to create new products if they know they'll have monopoly power over those products.
Natural Barriers to Entry - In these type of monopolies, other firms cannot enter the market because either the startup costs are too high, or the cost structure of the market gives an advantage to the largest firm. Most public utilities would fall into this category. Economists generally refer to these monopolies as natural monopolies.
(Source: http://economics.about.com)
