A monopoly is a market with a single seller. Monopolies arise for several reasons. One is patents and copyrights, which are granted to reward investment in research and creative work (medicine patents are a common example).
Another reason for a monopoly is ownership of key resources like coal mines. A monopoly is also created when the government grants a licence or franchise to a single company (like a license for making defense equipment).
Main characteristics of a monopoly market
- There is a single seller with considerable power over price.
- The product has no close substitute.
- High barriers to entry keep rivals out.
Examples of monopoly power
- Microsoft has long held a dominant, near-monopoly share of desktop operating systems. Most computer users worldwide use Windows, and its copyrights and patents make entry by a new company difficult.
- When a pharmaceutical company wins approval from the US Food and Drug Administration (FDA) for a new medicine, it can receive a period of market exclusivity, for example seven years for an approved orphan drug. During that period no other company may sell the same medicine, so research and development creates a temporary monopoly.
Key terms
- Copyright
- Copyright (or author's right) is a legal term used to describe the rights that creators have over their literary and artistic works.
- Food and Drug Administration (FDA)
- The US agency that protects public health by making sure that medicines, food, cosmetics and nutritional supplements are safe and truthfully labelled.
- Intellectual Property Rights (IPR)
- Intellectual Property Rights refers to the legal rights given to the inventor or creator to protect his invention or creation for a certain time.
- Franchise
- An arrangement in which a company sells another business the right to sell its products or services in return for payment.
Common questions
What is the difference between monopolies and oligopolies?
A monopoly exists when one company and its product dominate an entire industry, there is little to no competition, and consumers must purchase specific goods or services from the one company. An oligopoly exists when a small number of firms, as opposed to just one, dominates an entire industry. An oligopoly allows for these firms to collude by restricting supply or fixing prices in order to achieve profits that are above normal market returns.
Why are monopolies created?
While governments usually try to prevent monopolies, in certain situations, they encourage or even create monopolies themselves. In many cases, government-created monopolies are intended to result in economies of scale that benefit consumers by keeping costs down.
Utility companies that provide water, natural gas, or electricity are all examples of entities designed to benefit from economies of scale. Imagine, for example, the cost to consumers if 10 competing water companies each had to dig up the local streets to run proprietary water lines to every house in town. The same logic holds true for gas pipes and power grids.
In other cases, such as with the government policies that govern copyrights and patents, governments are seeking to encourage innovation.
If inventors had no protection for their inventions, all of their time, effort, and money spent writing books, recording songs, and conducting the research and development to create new drugs to combat disease would be wasted if another company could copy the idea and is able to create a competing product at a lower cost.