Glossary – Monopoly

Definition

A Monopoly is a market situation where a sinlgle firm (or individual) is the sole producer and seller of a product or service for an entire market.  Monopolies can arise because of specific resources, government regulations, costs of procution, or deliberate actions. They are characterized through a lack of competition, which results in lower production outputs and higher prices.

Example

When a pharmaceutical company creates a new drug, it can apply for a patent (i.e. the right to be the sole producer and seller of this drug for a limited time). If it is granted, the company becomes a monopolist for the patent period, which means entry to the market for other suppliers is prohibited.

Relevance

Due to the lack of competition, monopolies often result in higher prices, lower outputs and sometimes inferior quality, as compared to competitive markets. In reaction to that, the government can enact competition law, impose price regulations, nationalize the monopolies or, if the inefficiency is acceptable (or even desirable) for society, not do anything at all.

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