A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity or service. This market structure is characterized by the absence of economic competition to produce the goods or service, a lack of viable substitute goods, and the potential for a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The origins of the term "monopoly" are derived from the Greek words "monos" (meaning single) and "polein" (meaning to sell). Monopolies can form for various reasons including if a company owns a unique resource, has significant economies of scale, patents a new invention, or benefits from favorable government regulations.
One of the most classic historical examples of a monopoly was the Bell_System, which dominated the American telecommunications industry for much of the 20th century. The Bell System was often referred to as a "natural monopoly" because the infrastructure required to create a telecommunications network is so costly that having multiple companies build that infrastructure is inefficient. The U.S. government allowed this monopoly to exist under the agreement that it would be subject to federal regulation to ensure fair prices and practices. However, in 1982, the Bell System was broken up by antitrust regulators who believed that technological advancements had made competition viable and necessary.
The potential negative effects of monopolies can be significant. They can lead to higher prices, lower quality of goods and services, less choice for consumers, and stifled innovation. Without the pressure to compete with other firms, a monopolist can produce less, charge higher prices, and still reap significant profits. This lack of competition can lead to complacency about efficiency and product development, ultimately harming consumers and other businesses. Moreover, monopolies can have considerable power to influence government policies in ways that benefit them but might be detrimental to the broader public interest.
Nevertheless, not all monopolies are viewed negatively in economic policy. Governments may grant monopolies to encourage development in critical sectors, under what is known as a "legal monopoly." For example, utility companies often operate as monopolies with regards to the practical necessity of infrastructure, such as water pipes and electrical grids, which makes multiple providers impractical. In these cases, the government regulates the utilities to prevent the kind of abuse of power that can occur in less scrutinized environments. Additionally, patents grant temporary monopolies to inventors as an incentive for innovation, acknowledging the need for creators to benefit from their inventions without immediate competition. These examples show that while monopolies can pose challenges, they can also serve practical purposes within an economic framework.