Monopoly

Published Jan 6, 2023

Definition of Monopoly

A monopoly is a market structure in which a single firm is the sole producer and seller of a good or service. That means the firm is the only supplier in the market and therefore has no competitors. As a result, it has complete control over the price of the good or service and can theoretically set it at whatever level it wants.

Example

A classic example of a monopoly is the diamond industry before the 21st century. Before that time, the company De Beers Group was virtually the sole producer of diamonds in the world and therefore had near-complete control over the market. That means it could set the price of diamonds at whatever level it wanted and there was no real competition to challenge it (i.e., people had no other option than to buy their diamonds from De Beers). As a result, the De Beers Group was able to make huge profits for many years before its monopoly was slowly broken up by new competitors.

Why Monopoly Matters

Monopolies are important because they can have a significant impact on the economy. On the one hand, they can lead to higher prices and reduced output, which can have a negative effect on consumers and on the economy as a whole, due to deadweight losses. On the other hand, they can also lead to higher profits for the monopolist, which can be used to invest in research and development and create new products and services. Thus, it is important to understand the implications of monopolies and take appropriate measures to ensure that they do not lead to undesirable market distortions.