Definition
A monopoly is a market with a single seller offering a product with no close substitutes. Unlike a competitive firm, which takes the market price as given, the monopolist IS the market — it faces the entire downward-sloping market demand curve and must decide both how much to produce and what price to charge. This power to set price above marginal cost is what economists mean by market power, and it is the feature that distinguishes monopoly from competition.
The presence of a monopoly is not itself a legal violation or a moral failing. Some monopolies arise from legitimate sources — patents reward innovation, network effects naturally concentrate markets, and natural monopolies exist where a single firm can serve the market at lower cost than multiple firms. The economic concern is the deadweight loss created when price is set above marginal cost.
Why it matters
Monopoly pricing versus competitive pricing
Sources of monopoly power
Government-granted monopolies
Patents give inventors exclusive rights to their invention for a limited period, creating temporary monopolies in exchange for disclosure and incentive to innovate. Copyright and licenses operate similarly. These are deliberate policy choices — trading short-term inefficiency for long-run innovation.
Natural monopoly
Some industries have very high fixed costs and low marginal costs (electricity transmission, water distribution, railroads). The total cost of serving the market is minimized when a single firm serves all customers. Multiple firms in such markets would duplicate expensive infrastructure and face higher average costs than a single firm. The dilemma: the natural monopolist, if unregulated, will still price above marginal cost.
Network effects
When the value of a product increases with the number of users (social networks, operating systems, payment systems), the largest network becomes self-reinforcing. Competitors face an insurmountable disadvantage because users go where other users already are.
Price discrimination
A monopolist who can charge different prices to different buyers can increase total output (and profit) compared to single-price monopoly. First-degree (perfect) price discrimination captures all consumer surplus and eliminates deadweight loss entirely — but requires knowledge of each buyer's willingness to pay. Third-degree price discrimination (student discounts, airline pricing tiers, coupons) segments buyers by observable characteristics.