In perfect competition, profits invite entry until they disappear (Entry, Exit and the Long Run). A monopoly is the opposite extreme: a single seller of a good with no close substitutes, protected by something that keeps rivals out.
Key idea
A monopoly lasts only behind barriers to entry: economies of scale so large that one firm can serve the market most cheaply (a natural monopoly), legal protection such as patents, copyrights and exclusive licenses, control of a key resource, and network effects, where a product is more valuable the more people use it. A monopoly still faces the downward-sloping market demand curve.
Why it works
Without a barrier, a monopoly's profits would draw in rivals, just as they do in a competitive industry. Patents are a deliberate trade: inventors get a temporary monopoly (20 years from filing in the United States) as a reward for creating something new. Network effects work because buyers want what everyone else uses: a messaging app with all your friends on it beats a better app with none.
Worked example: Name the barrier
What keeps rivals out in each case? (a) A city grants one company the only taxi license at the airport. (b) A rail line between two cities, where building a second track would cost billions. (c) A video-game console that has the most games because it has the most players.
- (a) Legal protection: an exclusive license.
- (b) Economies of scale: one line can carry all the traffic at the lowest cost per trip.
- (c) Network effects: game makers go where the players are, and players go where the games are.
Answer: (a) legal, (b) economies of scale, (c) network effects.
Common mistake
Thinking a monopoly can charge any price it likes. It is the only seller, but buyers still decide how much to buy at each price: it faces the whole market demand curve. Raise the price and it sells less. Check: a monopolist picks a point on the demand curve; it can't pick a price and a quantity separately.
Governments also limit monopoly power through antitrust law, which can block mergers and forbid tactics such as agreeing with rivals to fix prices. How strictly to enforce it is debated.