What Is a Monopoly?Types, Regulations and Impact on Markets(Adam Hayes)

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

By Adam Hayes

Updated June 21, 2024

Reviewed by Caitlin Clarke

Fact checked by Vikki Velasquez

What Is a Monopoly?

A monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector. Monopolies are discouraged in free-market economies because they stifle competition, limit consumer substitutes, and thus, limit consumer choice.

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.

Key Takeaways

A monopoly is a market structure that consists of a single seller or producer and no close substitutes.
A monopoly limits available alternatives for its product and creates barriers for competitors to enter the marketplace.
Monopolies can lead to unfair consumer practices. They are discouraged in free-market economies.
Some monopolies, such as those in the utility sector, are government regulated.

Investopedia / Jessica Olah

Understanding a Monopoly

A monopoly is characterized by a single company supplying a good or service, a lack of competition within the market, and no similar substitutes for the product being sold. 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 by buying competing companies in the market through horizontal integration, and 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 and high barriers to entry, such as significant startup costs. There are no substitutes for the product sold by the seller.

Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems. As of May 2024, its desktop Windows software still held a market share of more than 73%.1

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, as with Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons.

The Natural Monopoly

A natural monopoly develops from 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, such as the utility industry, provide essential services and goods. Only one company commonly supplies energy or water to a region. The monopoly is allowed and heavily regulated by government municipalities. Rates and rate increases are controlled.

https://www.investopedia.com/terms/m/monopoly.asp?hid=826f547fb8728ecdc720310d73686a3a4a8d78af&did=19341602-20250904&utm_campaign=investopedia-term-of-the-day_newsletter&utm_source=investopedia&utm_medium=email&utm_content=090425&lctg=826f547fb8728ecdc720310d73686a3a4a8d78af&lr_input=46d85c9688b213954fd4854992dbec698a1a7ac5c8caf56baa4d982a9bafde6d

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