A monopoly is a market structure where a single entity, such as a company, dominates the market with its products or services. Monopolies often arise under extreme free-market capitalism, where there are typically no restrictions, allowing one company to grow and control the entire market for a particular product or service.

Monopolists generally aim to maintain high profits over the long term. However, this is less likely under perfect competition. In markets with perfect competition, any abnormal profits will attract new firms, leading to increased competition. This influx of competitors eventually eliminates the abnormal profits that the monopolist previously enjoyed.

In a monopoly market, competition is absent as one seller dominates, becoming the sole provider of a particular product or service, often without close substitutes.

While monopolies are typically associated with large businesses, size alone does not define a monopoly. Even small businesses can monopolize a market if they have the power to set prices and control the market within their specific niche. Ultimately, a monopoly is characterized by the ability of an entity to exert full control over a market, regardless of its size.

Characteristics of a Monopoly Market

The following are typical characteristics that define a monopoly market:

• Lack of substitutes: In a monopoly market, a single firm produces a product or offers a service that has no close substitutes. The products are usually exceptional (unique).
• Price Maker: Monopolists are the ones who decide how much a product or service should cost in a given market. In other words, they are price setters, and consumers are usually at their mercy.
• High barriers to entry: A monopoly is also characterized by barriers to market entry. There are regulations that restrict the entry of new firms into a monopoly market. The restrictions ensure that monopolists do not face any competition and that they continue to enjoy control over the market.
• Price discrimination: In a monopoly market, sellers are at liberty to change prices and quantity their products and services at any given time. For instance, if the demand for a given product increases, the monopolists are likely to revise the price of that particular product upwards. Generally, price changes are always as a result of market conditions.
• Single seller: A monopoly market is always served by one seller. It means that a single business entity is the same as the market it serves. In this type of market, one business entity is the sole producer of all the output for a good or service.

• Profit maximizer: The motive that guides monopolists is revenue maximization. They do this either by increasing the prices of their products and services in the market or expanding their production scales.

Sources of Monopoly Power

In a market an individual’s power to control the market is generated by specific sources. Several factors contribute to the formation of monopolies:

1. Barriers to Market Entry: These include government licenses, copyrights/patents, ownership of critical resources, and high startup costs, all of which restrict new competitors from entering the market.
2. Exclusive Information: Monopoly firms often possess specific information that other firms do not have, giving them a significant competitive advantage.
3. Control Over Prices: In a monopoly market, a single entity controls the market, including the pricing of goods and services. This allows the monopolist to influence market prices single-handedly.

Reasons Why Monopolies Are Illegal

Monopolies are deemed illegal for several reasons:

1. Inferior Products and Services: Without competition, monopolists often produce lower-quality products and services, disadvantaging consumers.
2. Excessive Pricing: Monopolies can inflate the costs of products and services, exploiting consumers and denying them the option to choose competitors.
3. Artificial Scarcity: Monopoly markets may create artificial scarcities to manipulate prices, circumventing the natural laws of supply and demand.

To curb monopolies, the U.S. Congress passed the Sherman Antitrust Act in 1890, the first legislation aimed at limiting monopolistic practices. This act received strong congressional support, with a Senate vote of 51 to 1 and unanimous support in the House of Representatives with a vote of 242 to 0.

In 1914, two additional antitrust laws were enacted to further protect consumers and prevent monopolies:

1. Clayton Antitrust Act: Introduced new rules for mergers and corporate practices, specifying examples of conduct that would violate the Sherman Act.
2. Federal Trade Commission Act: Established the Federal Trade Commission, which sets business standards and enforces antitrust laws.