What Is a Monopoly? Types, Regulations, and Impact on Markets

What Is a Monopoly?

A monopoly is a market structure where a single seller or producer assumes a dominant position in an industry or a sector. Monopolies are discouraged in free-market economies as they stifle competition and limit consumer substitutes.

In the United States, antitrust legislation is in place to restrict monopolies, ensuring that one business cannot control a market and use that control to exploit its customers.

Understanding a Monopoly

A monopoly is a business characterized by a lack of competition within a market where there are no similar substitutes for its product. Monopolies can dictate price changes and create barriers for competitors to enter the marketplace.

Companies become monopolies by controlling the entire supply chain, from production to sales through vertical integration, or buying competing companies in the market through horizontal integration, becoming the sole producer.

Monopolies typically reap the benefit of economies of scale, which is the ability to produce mass quantities at lower costs per unit.

Types of Monopolies

The Pure Monopoly

A pure monopoly is a single seller in a market or sector with high barriers to entry, such as significant startup costs, whose product has no substitutes.

Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems. As of 2024, its desktop Windows software still held a market share of 72%.

Monopolistic Competition

Multiple sellers in an industry sector with similar substitutes are defined as having monopolistic competition. Barriers to entry are low, and the competing companies differentiate themselves through pricing and marketing efforts.

Their offerings are not perfect substitutes, such as Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons.

The Natural Monopoly

A natural monopoly develops in reliance on unique raw materials, technology, or specialization. Companies with patents or extensive research and development costs, like pharmaceutical companies, are considered natural monopolies.

Public Monopolies

Public monopolies provide essential services and goods, such as the utility industry, as only one company commonly supplies energy or water to a region. The monopoly is allowed and heavily regulated by government municipalities, and rates and rate increases are controlled.

Pros and Cons of a Monopoly

Without competition, monopolies can set prices and keep pricing consistent and reliable for consumers. Monopolies enjoy economies of scale, often able to produce mass quantities at lower costs per unit. Standing alone as a monopoly allows a company to securely invest in innovation without fear of competition.

Conversely, a company that dominates a sector or industry can use its advantage to create artificial scarcities, fix prices, and provide low-quality products. Consumers must trust that a monopoly operates ethically due to limited or unavailable substitutes in the market.

Monopoly Regulations

Antitrust laws and regulations are in place to discourage monopolistic operations, protect consumers, and ensure an open market.

In 1890, the Sherman Antitrust Act was passed by the U.S. Congress to limit "trusts," a precursor to monopolies or groups of companies that conspired to fix prices. This act dismantled monopolies, including Standard Oil Company and the American Tobacco Company.

The Clayton Antitrust Act of 1914 created rules for mergers, corporate directors, and listed practices that would violate the Sherman Antitrust Act. The Federal Trade Commission Act created the Federal Trade Commission (FTC), which sets standards for business practices and enforces the two antitrust acts along with the Antitrust Division of the U.S. Department of Justice.

The most consequential monopoly breakup in U.S. history was that of AT&T. After controlling the nation's telephone service for decades as a government-supported monopoly, AT&T fell to antitrust laws. In 1982, AT&T, which had telephone lines that reached nearly every home and business in the U.S., was forced to divest itself of 22 local exchange service companies, the main barrier to competition.

The Bottom Line

A monopoly is a single seller or producer without direct competitors for its products or services due to its business practices. A monopoly can dictate price changes and create barriers for competitors to enter the marketplace.

Antitrust legislation is in place to restrict monopolies, ensuring that one business or group of businesses cannot control a market and use that control to exploit customers.