What Is a Monopoly in Business? (Plus Definition and Examples)

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What Is a Monopoly in Business? (Plus Definition and Examples)

By Indeed Editorial Team

Updated June 15, 2022 | Published July 7, 2021

Updated June 15, 2022

Published July 7, 2021

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Businesses thrive on competition in a free market, which generates benefits like sustainable prices and opportunities for innovation. When businesses have no significant competition in a niche, they may create a monopoly. While a monopoly can offer companies a focused target audience and more profits, this economic condition also has setbacks that may be important for professionals to consider. 

In this article, we explore what a monopoly is in business, explain how it works, list examples of monopolies, provide the pros and cons of this economic condition and define what a monopoly is compared to an oligopoly.

Related: What Is a Monopoly Market? Characteristics and FAQs

Key takeaways:

  • A monopoly is an economic status that occurs when a company encounters no competition within a market or industry and can set its prices without oversight.

  • Some types of monopolies occur naturally while others form when a company takes deliberate actions through legal or illegal means. 

  • Creating a monopoly has both advantages and disadvantages, and studying them can help you strategize new business solutions and avoid certain issues in the future. 

 

What is a monopoly in business?

A monopoly is an economic term that refers to a lack of competition in a market or industry. Without competition, one business can become the sole proprietor of all relevant goods or services. For example, if a state only has one internet company operating within state lines, that business has a monopoly on internet services in that area. Since there aren’t any competitors to challenge the company, its prices may rise as demand increases.

Monopolies often affect industries negatively, but the circumstances can differ across different industries and markets. For example, consider a company that produces the only water purifier in the United States able to desalinate seawater. This company still has a monopoly on that service, but it serves a vital function for society.

How does a business monopoly work?

A monopoly works by creating market conditions where one business serves the majority of customers with a limited amount of pure competition. Some monopolies form when an organization oversees every component of a supply chain, while others form when one business purchases all its competitors to dominate the market. Monopolies typically depend on the exclusivity of the products or services they provide or contracts from governmental agencies. After they form a monopoly, organizations can raise prices without oversight. 

Free markets often encourage economic conditions with more competition and innovation, but monopolies can still form if certain situations occur. Here are some situations that often result in a monopoly: 

  • Nationalization: A monopoly can form when a governmental bureau oversees a certain industry or market, like food production or mail delivery.

  • Intellectual property protection: Individual companies or people can copyright their concepts, products and services resulting in a monopoly.

  • Resource distribution: Some companies use monopolization methods to control an industry or market for an essential resource like electricity, oil and water. 

  • Company mergers and acquisitions: Some companies purchase other businesses to limit competition, which creates a business monopoly if too many competitors in one market merge. 

Related: Understanding Market Systems: 5 Key Types 

Examples of business monopolies

Several types of monopolies can form depending on the industry and specific circumstances. Here are some examples of monopolies that can exist in a given market:

Legal monopolies

Legal monopolies typically form when a company gains exclusive access to a product through a government order. For example, if a software company develops a mobile phone service that enhances communications through specialized features, the federal government may give it a legal monopoly status. This allows the business to be the sole provider of this software in the market, with exclusive rights to production and distribution. . As a result, the business offers the software at a price regulated by the government. 

Related: Understanding How a Market Economy Works

Natural monopolies

These monopolies form when natural resource suppliers control portions of the utility market because scaling costs are too high for new suppliers to form Federal laws often allow these utility monopolies to exist because they provide necessary services. Natural monopolies might mean that only one company services your gas, electric or water account. Customers can still choose an individual natural gas or electricity supplier, but the utility company still owns and services the account.

Read more: What Is a Natural Monopoly? (Definition and Examples)

State monopolies

Also called public monopolies, state monopolies form when the government has full ownership of a product, business or service. For example, the U.S. Postal Service is a state monopoly because it’s a government-run business that services all residents in the nation. State monopolies exist to encourage fair pricing strategies and conditions in sectors that supply necessary services, like utilities. The state creates specific standards these services follow to benefit the customers.

Unnatural monopolies

Unnatural monopolies are a mix of natural and state monopolies. A private company may create a monopoly on a product or service that the state protects through a legal patent. Patents allow companies to protect their intellectual property so their products and services are the only versions the consumers can buy. This is typical in the drug industry, as pharmaceutical companies patent new drugs unfamiliar to consumers, thus monopolizing the market. 

Related: What Is Monopolistic Competition? (Plus 5 Characteristics)

Pros of a business monopoly 

Here are some common advantages of business monopolies:

  • Limited competition: With less competition in the market, businesses can focus on increasing product quality and less on outselling other companies. 

  • More sales and higher income: Companies that control a market typically have higher sales. They can also charge more for products or services because of higher demand and the supplier-to-customer ratio, increasing their income.

  • Exclusive products: Consumers can get access to exclusive products, making them more valuable on the market and increasing brand awareness for companies.

  • Price stability: Even with higher prices, monopolized markets experience more stable price points since there is no competition to encourage changing rates.

  • More financial resources: With no competition, companies typically spend less money on marketing research and reallocate financial resources to development, production and recruiting talent. 

  • Investor interest: A patent that creates a monopoly for a company might attract more potential investors, as these types of unnatural monopolies often are profitable for companies.

Related: How Does Supply and Demand Affect Prices?

Cons of a business monopoly

 

Here are some potential disadvantages of a monopoly and some ways to avoid them:

  • High prices: Some companies with a monopoly raise prices to meet the demand for their exclusive products or services, reducing the number of consumers who can afford them. By keeping prices lower to appeal to a wider customer base and attract new buyers, companies can better ensure a profitable monopoly.

  • Power consolidation: Monopolizing an industry gives all the political, economic and social power of that industry to one business. To protect consumers, the Federal Trade Commission upholds antitrust laws that regulate or restrict the amount of power these companies can accrue through mergers or patents. 

  • Fewer choices: Consumers have fewer choices for goods and services, which may limit their ability to maintain optimal quality of life. Companies may also experience decreasing profits if consumers can no longer afford their merchandise and seek options outside the monopoly through international e-commerce. 

  • Price discrimination: Some monopolized companies engage in price discrimination, which involves charging one customer more for the same products or services than another customer in a different area or demographic. Many companies avoid this to maintain a legal monopoly and appease a wider customer base.

  • Decreased quality: If companies have a monopoly on a certain product, they might allocate fewer funds toward quality control, since customers may still be likely to purchase it regardless. By maintaining an in-depth quality assurance process, companies can better maintain customer loyalty, especially if the monopoly ends.

Differences between a business monopoly and an oligopoly

Monopolies occur when one business operates exclusively within a market. Oligopolies occur when only a few companies take part in an industry or market. For example, one or two competing utility companies may serve a single area rather than just one. The utility company example still applies, as many utility companies control an entire area alongside one or two competitors. A single utility company might service several states or counties, while a similar competitor services some overlapping states or counties. 

In some situations, a company may be a monopolizing force in one area, but become part of a state oligopoly if other regional companies offer similar utility services. Legal monopolies gain protection from the state, but oligopolies rarely receive the same benefits.

Unlike monopolies, oligopolies can also encourage fair competition since each company exists in the same industry. An oligopoly also allows a consumer to choose between just a few, products or services, whereas a monopoly may limit the number of choices a consumer has.

Related: What Is Monopolistic Competition? (Plus 5 Characteristics)