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Monopoly | Habefast

Habefast En Glossary Monopoly

Monopoly, definition

A monopoly defines a privilege that a company or a public organization has over the exclusive production or distribution of a product or service. The opposite of a monopoly is a monopsony, when a single applicant is faced with a large number of suppliers.

This situation allows companies to gain market share or to hold it entirely. In fact, in a monopoly situation there is no competition, which also allows the monopolistic company to be a “price maker” and therefore to have greater freedom to set the price of a product or service.

Where does a monopoly come from?

A monopoly can be established in a market for several reasons.

It can be natural, in which case it is a monopoly due to market conditions that make competing businesses unprofitable in the long run. Also, some markets with high barriers to entry may prevent some companies from entering the market and leave only one company covering the market. For example, the construction of the Channel Tunnel has created a natural monopoly situation.

It can be caused by a technological advance that allows the firm marketing this innovation to be temporarily in a monopoly situation. This is called an innovation monopoly. An example of this type of monopoly is the BlackBerry.

Also, a monopoly can be legal. In this situation, the law allows to restrict the number of suppliers present on a market. This type of monopoly is often set up in areas such as security or land use planning.

In order to observe a true monopoly, the good or service produced must not be substitutable or too rare, i.e. there must be no alternative for consumers.

The different types of monopolies

  • Private and public monopoly

    A private monopoly is a monopoly held by a private organization. A public monopoly, on the other hand, is a monopoly existing in a public market. Often, state monopolies operate on public goods and constitute a public service. For example, in Switzerland the salt market is a monopoly market.

  • Bilateral Monopoly

    A bilateral monopoly is a situation in which only one seller and one buyer face each other.

  • Quasi-monopoly

    Quasi-monopolies define a situation where one seller or company largely dominates its market making competition obsolete. One example is Google, which has a 93% share of the search engine market.

  • Oligopoly

    An oligopoly represents a situation where a small number of vendors have a monopoly on supply. It is, in a way, a group monopoly. The GAFA (Google, Apple, Facebook and Amazon) are a relevant example of an oligopoly in the Internet market, which they largely dominate.

    This situation can lead to the establishment of a cartel, i.e. the few companies present on the market set up an informal agreement for price fixing or on market regulation strategies.

  • Duopoly

    In a duopoly situation, only two suppliers are present on a market faced with a large number of demanders. This is the case, for example, of Airbus and Boeing in the civil aircraft market.

Regulated market situations

These market situations are ideal for companies, which is why, even if monopolies are strongly controlled, companies still seek to strengthen their market power in order to have a dominant position.

On the other hand, monopoly situations can be harmful to the consumer. By not respecting the criteria of pure and perfect competition, a company without competitors can set prices independently of the law of supply and demand.
In fact, in Europe, the European Commission controls the market situation so that the principle of pure competition (principle of market atomicity and free market entry) is respected.