Monopoly Defined

Monopoly can be considered the opposite of perfect competition. While at first glance a monopoly may appear to be a rare market structure, it is not so. Several industries in the United State have monopolies. Some utility companies provide examples of a monopolist. A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes, and in which it is very hard or impossible for another firm to coexist

The definition is quite stringent. First, there must be only one firm in the industry—the monopolist must be "the only supplier in town." Second, there must be no close substitute for tit monopolist's product. Thus, even the sole provider of natural gas in a city would not be considered a pure monopoly, since other firms offer close substitutes like heating oil and coal. Third, there must be some reason why survival of a potential com­petitor is extremely unlikely, for otherwise monopolistic behavior and its excessive profits could not persist.

These rigid requirements make pure monopoly a rarity in the real world. The local telephone company and the post office are good examples of one-firm indus­tries that face little or no effective competition. But most firms face competition from substitute products. Even if only one railroad serves a particular town, it muss compete with bus lines, trucking companies, and airlines. Similarly, the producer of a particular brand of beer may be the only supplier of that specific product but t firm is not a monopolist by our definition. Since many other beers are close substi­tutes for its product, the firm will lose much of its business if it tries to raise its price much above the prices of other brands.

And there is one further reason why the unrestrained pure monopoly of eco­nomic theory is rarely encountered in practice. We will learn in this chapter that pure monopoly can have a number of undesirable features. As a consequence, i markets where pure monopoly might otherwise prevail, the government has inter­vened to prevent monopolization or to limit the discretion of the monopolist to set its price.

If we do not study pure monopoly for its descriptive realism, why do we study it? Because, like perfect competition, pure monopoly is a market form that is easier to analyze than the more common market structures that we will consider in the next chapter. Thus, pure monopoly is a stepping stone toward models of greater real­ity. Also, the "evils of monopoly" stand out most clearly when we consider monopoly in its purest form, and this greater clarity will help us understand why governments have rarely allowed unfettered monopoly to exist.

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