Monopoly

We'll explore monopolies, a market structure that sits at the very opposite end from perfect competition. In a monopoly, a single dominant firm controls the entire supply of a good or service, making it the only seller in the market. An example might be a regional water supplier in the United Kingdom or a local electricity utility in the United States. These firms have the power to set prices as their product typically has no close substitutes. This uniqueness, coupled with barriers that prevent other companies from entering the market, gives monopolies a tremendous degree of influence over both price and output. Monopolies are characterized by significant barriers to entry, which may be economic, legal, or deliberate. Economically, massive fixed costs or economies of scale can keep potential competitors away. Legal barriers often involve patents or government licenses granting exclusive rights to operate. Deliberately, monopolists might engage in exclusionary tactics such as restrictive contracts with suppliers or retailers or even predatory pricing where the firm lowers its prices below cost to drive rivals out. As a result, the monopoly's product is typically unique and consumers have very limited options to switch. Unlike a perfectly competitive firm which accepts the market price, a monopolist is considered a price maker. Its demand curve is downward sloping and relatively inelastic, allowing it to profit by equating marginal revenue with marginal cost. This generally means higher prices and