We explain what a monopoly is, how it arises, and its consequences. In addition, we explore its main characteristics, provide examples, and more.
What is a monopoly?
A monopoly is a market situation in which there is a single supplier or manufacturer of a product or service without there being other suppliers or competitors offering the same product or service. It is an imperfect competition market situation where the interaction takes place between a single monopolistic supplier and many demanders.
Etymology: The word "monopoly" derives from the Greek mōnos, meaning "one" and pōlein, meaning "to sell", and makes reference to the existence of a single seller dominating a product category in the market.
A monopoly is the opposite of a free market, in which prices are regulated by the law of supply and demand. When a monopoly exists, a single producer can set any price to their products, and demanders will nevertheless buy it as there is no other alternative.
- A monopoly is a type of economic market in which there is only one supplier for a product or service, so they can set the price they may want due to the absence of competition.
- It is the opposite of a free market, an economic system in which there are multiple suppliers and prices are regulated by the law of supply and demand.
- A monopolistic market can arise for several reasons, the main one being a country’s legislation.
- See also: Oligopoly
How does a monopoly arise?
A monopoly may arise for multiple reasons:
- Country regulations. Negotiations between corporations and the state may result in regulations favoring a powerful minority group at the expense of the exploitation of natural resources and the displacement of small and medium-sized businesses.
- Sourcing of raw materials. Natural resources used as raw materials for industry are sometimes difficult to access and obtain, requiring large investments and structures for their extraction. It is companies with larger capital and greater influence that often develop these types of business.
- Intellectual property rights for researchers. Patents are a right granted by the state giving the exclusive right to produce and commercialize a product for a certain number of years, thereby establishing a monopoly for a set period. Once this period has expired, any other supplier may market the same product. The aim is to promote research and innovation, and through the patent the inventor can recover investment and obtain a profit.
For example: Developing a drug requires a large investment, research time, and testing to evaluate its effectiveness and safety. After the expiration of the patent, the drug can be commercialized by other suppliers.
- Imperfect competition. Monopolistic companies usually have large investment capital and a capacity for mass production that makes it difficult or impossible for the existence of competitors in the market. Oligopolistic companies can arise out of mergers between several companies, or ties with powerful state officials who exert influence to their own private economic advantage.
- Mergers. Large companies often buy smaller companies or merge with a large company that sells other types of products in the same sector to gain market share.
For example: A company that produces tea and herbal infusions buys one that manufactures coffee, and continues to market it under the original brand name to retain customers.
Characteristics of a monopoly
The main characteristics of a monopoly include:
- It is an imperfect competition market structure in which one supplier has exclusivity to produce and market a product or service.
- It may arise for various reasons, the main one being country regulation, which allows for the existence of a monopoly in the long term.
- A sole supplier has the power to control market price and the quantity of goods offered for the product or service category it provides.
- It establishes a barrier for other suppliers and prevents them from entering the market and becoming eventual competitors, as they do not have the capital, structure, or regulatory privileges to compete with monopolistic companies.
Consequences of a monopoly
At present, there are monopolistic situations that weaken free market economies, since they cause imbalance in prices, quality, as well as in the available quantities of goods in the market, making a free exchange of products impossible. As a result, demanders do not have freedom of choice, and a single supplier can abuse the situation to their own advantage.
As a monopolistic company continues its activity over time, the quality of the goods or services it offers often decreases to obtain a higher profit at the lowest cost. This happens because there is no pressure from other competitors, and people cannot choose other suppliers; therefore they continue to buy the same product, even if it is low quality.
Examples of monopoly
Examples of monopolistic companies include:
Telefonos de Mexico (TELMEX)
TELMEX was founded in 1947 in Mexico City, and in 1950 it took over the US company ITT Corporation, becoming the sole provider of landline telephone service in Mexico. In 1972 the company was taken over by the state, and in 1990 it was reacquired by the private sector, when it merged with other smaller companies.
From 1997 onwards, new companies appeared in the Mexican market offering prepaid telephone service (without monthly subscription) with a recharge system. However, they did not become direct competitors of Telmex.
In subsequent years, with the development of mobile telephony and new Mexican state laws passed, Telmex ceased to be a monopoly, and today, despite having lost a large part of market share, Telmex continues to be one of the most important companies in Mexico.
Casinos Austria International
Casinos Austria International is one of the most important gaming and entertainment corporations, founded in 1967 in Austria. It owns and manages casinos, slot machines, lotteries and online gaming platforms worldwide.
Until the 1990s, it was a monopolistic company in several countries, but with the advent of online gaming and casino platforms, market rules changed and new suppliers were able to enter the market, even if Casinos Austria continues to be one of the main companies in the sector.
- RAE, (2023). Monopolio. RAE.
- Economía y desarrollo (2017). ¿Por qué surgen los monopolios? cap. 19 - microeconomía (video). YouTube.
- Lugo López, J. y Zurita Gonzáles, J. (2004). El costo social del monopolio TELMEX en la telefonía fija. UAEmex.