Monopoly
| Author | G. Maxwell |
| Pages | 521-522 |
Page 521
A monopoly is a market condition in which a single seller controls the entire output of a particular good or service. A firm is a monopoly if it is the sole seller of its product and if its product has no close substitutes. Close substitutes are those goods that could closely take the place of a particular good; for example, a Pepsi soft drink would be a close substitute for a Coke drink, but a juice drink would not. The fundamental cause of monopoly is barriers to entry; these are technological or economic conditions of a market that raise the cost for firms wanting to enter the market above the cost for firms already in the market, or otherwise make new entry difficult. If the barriers to entry prevent other firms from entering the market, there is no competition and the monopoly remains the only seller in its market. The seller is then able to set the price and output of a particular good or service.
A monopoly—in its pure form—is actually quite rare. The majority of large firms operate legally in a market structure of oligopoly, which means that a few sellers divide the bulk of the market. People often have the impression that the goals of a monopolist are somehow evil and grasping, while those of a competitor are wholesome and altruistic. The truth is that the same motives drive the monopolistic firm and the competitive firm: Both strive to maximize profits. A basic proposition in economics is that monopoly control over a good will result in too little of the good being produced at too high a price. Economists have often advocated antitrust policy, public enterprise, or regulation to control the abuse of monopoly power.
For a monopoly to persist in the long run, barriers to entry must exist. Although such barriers can take various forms, they have three main sources:
A key resource is owned by a single firm.
The government gives a single firm the exclusive right to produce a specific good.
The cost of production makes a single producer more efficient than a large number of producers.
The first and simplest way for a monopoly to come about is for a single firm to own a key resource. For example, if a small town had many working wells owned by different firms, no firm would have a monopoly on water. If, however, there were only one...
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