In economics, a monopoly is a situation where one company controls the supply and trade of goods.
It has the effect of undermining the benefits of capitalism (such as competition and innovation) and can lead to poor outcomes for consumers – namely, lower prices.
Monopolies can emerge for a variety of reasons, such as government policy, the nature of the product, and anti-competitive practices. Each of these reasons underpins a particular form of monopoly, each of which are outlined below.
Types of Monopoly
1. Pure Monopoly
The term pure monopoly is used because many other monopolies don’t necessarily meet the exact definition of 100% control over a market by one firm.
Pure monopolies refer to situations when there is just a single supplier or producer of a good or service who has complete control over the market (Burkett, 2006).
This means that consumers have no choice but to purchase from this sole producer, thereby giving the producer the power to set high prices without fear of competition.
A common monopoly example in this case is government-run healthcare where there is only one healthcare provider in a nation – they have exclusivity and customers are required to use their services, regardless of whether or not they’re unhappy with the product.
In a pure monopoly, the monopolist can also dictate the quality of goods and services since there’s no competition driving innovation or improvement.
The lack of competition might lead to substandard products and customer service which can be frustrating for consumers (Carare, 2011).
2. Natural Monopoly
Natural Monopoly occurs when a single company can provide goods or services to the entire market at a lower cost than two or more competing firms.
These types of monopolies usually exist in utility sectors such as water, natural gas, and electricity (Corneli & Kihm, 2016) because they require large initial investments in infrastructure and maintenance, making it difficult for new companies to enter the market.
A natural monopoly also often benefits consumers since having multiple companies performing similar services could lead to duplication of resources. Here, too many competitors can lead to inefficiencies that would result in increased costs being passed on to consumers.
However, due to the natural monopoly’s dominant position, it is often subject to government regulations such as price controls or performance standards to prevent them from exploiting their monopoly power (Corneli & Kihm, 2016).
3. Private Monopoly
Private Monopoly occurs when a single company dominates the market due to factors such as intellectual property rights, patents, or economies of scale. It is opposed to a public monopoly, where the government monopolizes an industry (Moszoro, 2018).
In contrast to a natural monopoly, which is generally sustained by high capital costs, a private monopoly tends to have industry insider advantages. For example, a company could have developed a unique product or service that no other business can replicate which gives it an advantage over rivals.
Furthermore, companies can establish private monopolies through mergers and acquisitions of smaller entities within the same industry to eliminate competition (see also: monopoly by merger).
While these efforts may lead to short-term profits for companies, private monopolies are detrimental for consumers since they could lead to higher prices or sub-standard product quality (Moszoro, 2018).
Governments regulate such entities by imposing price controls and forcing the company to split into multiple smaller competitors. This is in order to generate more competition and prevent the negative consequences associated with excessive monopolization.
4. Public Monopoly
Public Monopoly occurs when the government is the sole provider of goods and services in a given area.
It happens when the government assumes exclusive control over an industry or service to provide citizens with essential goods and services that are necessary for the public good.
This type of monopoly is usually formed in strategic sectors such as public transportation, defense, postal services, and healthcare (Moszoro, 2018).
The aim of establishing a public monopoly is to ensure the fair and universal provision of public goods and services, often free at the point of use.
A public monopoly may also be established if competition is not possible (i.e. in building cross-country railway infrastructure).
In communist nations, the government aims to monopolize all forms of production.
5. Legal Monopoly
Legal Monopoly arises due to government regulations that give exclusive rights and privileges to one firm.
For instance, some countries offer legal monopolies to companies involved in providing essential goods such as pharmaceuticals, healthcare, and defense (Moszoro, 2018).
These enterprises receive favorable treatment from the government since they play critical roles in addressing public health problems, meet defense needs during wars, and so on.
Ideally, a government will run an open tender for work before establishing a legal monopoly in order to identify the most suitable firm to provide the goods or services.
While Legal Monopolies are authorized by the government and usually serve a significant public interest, it is vital to keep them under check. Their significant power means they need significant oversight and transparency (Moszoro, 2018).
Therefore, governments continuously monitor these monopolistic entities through review boards to ensure prudent business practices.
6. Monopoly by Merger
Monopoly by Merger occurs when different companies in a particular industry merge or acquire one another, producing a single company that has complete control of the market.
Monopoly by merger often happens due to strategic decisions made by companies that want total control over their industries (Marinescu & Hovenkamp, 2019).
For instance, if a company manages to acquire all the significant players in its industry, it can create an effective monopoly with increased pricing power.
Government regulators keep a close watch on mergers and acquisitions to try to prevent monopoly by merger (Marinescu & Hovenkamp, 2019). They enforce laws against anti-competitive mergers and also encourage alternative firms’ growth and entry into such industries.
7. Technological Monopoly
Technological Monopoly arises from companies that develop and own unique technological advancements or proprietary knowledge. These market advantages give them exclusive control over their industry.
This type of monopoly is generally created based on the ownership of an intellectual property right over an important technology (Teachout, 2020).
For instance, companies involved in developing software such as operating systems, video encoding, and professional editing tools could establish monopoly power by creating niche solutions with unique features that consumers can’t find anywhere else.
These monopolies could last for a long time because other competitors would need to invest substantial resources into research and development before they can produce something comparable (Marinescu & Hovenkamp, 2019).
Often, any upstarts who try to compete will be instantly bought-out so the company can maintain their monopoly, like when Facebook purchased Instagram.
Governments attempt to control technological monopolies through patent laws that regulate how long a company can hold its legal rights to product development insights (Teachout, 2020).
This ensures that the inventor or creators receive adequate compensation for their work while also allowing further market innovation, improvements in quality and competition among businesses.
8. Geographic Monopoly
Geographic Monopoly occurs primarily in small communities where a single enterprise dominates the market due to unique local conditions such as location, demographics, and climate.
Because of these conditions, residents have limited alternative options resulting in the business being free from direct competition, leading to higher profits for the firm (Corneli & Kihm, 2016).
For instance, if a town has only one gas station or grocery store, they will possess a Geographic Monopoly over those markets. This provides them the opportunity to exploit this position by having complete control over product pricing and supply which could significantly affect their consumers (Carare, 2011).
Governments often intervene to ensure adequate competition is allowed to protect consumers from potential exploitation. Policies such as zoning regulations and tax incentives could encourage new businesses entry into such areas while providing affordable solutions that benefit both customers and private businesses alike.
9. Predatory Monopoly
Predatory Monopoly happens when a company uses its market dominance to eliminate competition through various anticompetitive strategies.
These strategies could include exclusive agreements or discounts that make it impossible for other businesses to survive, and monopoly by merger (Marinescu & Hovenkamp, 2019).
Once the competitors are driven out of the marketplace, these companies are free to raise prices and enjoy higher profits (Burkett, 2006).
For instance, if a dominating business uses exclusive incentives such as offering cash backs, rewards and loyalty programs, it can coerce customers to shift from smaller firms towards itself and induce undue pressure on its rivals.
10. Cartel or Collusive Monopoly
In this type of monopoly, several firms collaborate to form a cartel that controls the entire market for a particular good or service.
They do this by agreeing to fix prices, limit production, and control the supply of their product (Adelman, 2016).
By working in unison, they can exert complete monopoly power over the market.
The most famous example of a cartel is OPEC (Organization of Petroleum Exporting Countries) which comprised oil-producing nations such as Saudi Arabia, Iran and Venezuela (Adelman, 2016).
These countries came together to control the price and output of oil on the world market. The aim was to reduce competition among themselves thereby driving up prices and making more profit available for all member countries.
While cartels can bring benefits like stabilizing (higher) prices for consumers when there’s high volatility in commodity markets; economists argue they restrict choice and hence must be viewed skeptically (Carare, 2011).
11. Franchise Monopoly
In this type of monopoly, a franchisor, which is usually a larger company with a well-established brand name and reputation, allows a franchisee to open their own version of that company’s business in exchange for payment and ongoing royalties.
These franchisees are required to follow strict guidelines set by the franchisor which lock the franchises into purchasing products from the corporation (Deshbandhu, 2020).
While franchisees can operate their businesses under an already established brand name without taking too much risk; they end up paying significant royalties (i.e., fees).
They have limited autonomy because they must adhere to strict protocols laid out by their parent companies, so creativity needs to be approached through obtainable constraints. Furthermore, they often cannot change their product marketing to create monopolistic competition which may have helped them differentiate themselves in the market somewhat.
The franchisors do benefit from economies of scale that come with expansion with lower risk since it’s typically borne by the franchisee (rather than them).
12. Patent Monopoly
Patent monopoly is granted to inventors of new products or technologies. Patents give inventors a legal monopoly over the use, production, and sale of their inventions for a certain period (i.e. 20 years).
This means that no other entity can produce or exploit the invention without permission, giving the patent holder total control over the market (Bair, 2015).
A great example in this context is Apple’s iPhone which has multiple patents registered on different aspects of its design & functionality.
As such, other manufacturers who wish to produce something similar often find themselves in violation of these patents (Bair, 2015).
Patents promote innovation by encouraging entrepreneurs and inventors to invest in research and development without having to worry about others copying and profiting from their ideas (during that time period).
However, they can lead to monopoly pricing and inhibit competition – ultimately leading to sub-optimal resource allocation as opportunities aren’t leveraged optimally because patents have created barriers that might inhibit market entry.
A monopsony occurs when there’s only one buyer controlling an entire market. It is essentially an inverted monopoly.
In a monopsonistic market situation, buyers enjoy significant purchasing power since they are the only ones buying from producers.
They can therefore control the supply lines, force suppliers to sell at (or near) cost, and corner the entire market (Carare, 2011). This can be anti-competitive, reduce profitability in an industry, and stifle innovation.
Open markets are a core feature of capitalism and help promote productivity, innovation, and prosperity. But an unregulated open market may end in a monopolistic situation. To address this, smart pro-competition government policies are necessary.
However, at other times, governments implement monopolies intentionally, often to secure equitable access to goods and services for the populace.
Overall, economists need to be aware of the different market conditions that may lead to different types of monopolies and, with this knowledge, also develop policies to avoid these market conditions to encourage competition that best serves consumers.
Adelman, M. A. (2016). OPEC as a Cartel. In OPEC Behaviour and World Oil Prices (pp. 37-63). Routledge.
Bair, S. P. (2015). The Psychology of Patent Protection. Conn. L. Rev., 48, 297.
Burkett, J. P. (2006). Microeconomics. Oxford: Oxford University Press.
Carare, P. M. (2011). Monopoly: Advantages and disadvantages. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1787089
Corneli, S., & Kihm, S. (2016). Will distributed energy end the utility natural monopoly. Electricity Daily, 2, 9.
Deshbandhu, A. (2020). Towards a Monopoly: Examining FIFA’s Dominance in Simulated Football. gamevironments, (12), 28-28.
Marinescu, I., & Hovenkamp, H. (2019). Anticompetitive mergers in labor markets. Ind. LJ, 94, 1031.
Moazed, A., & Johnson, N. L. (2016). Modern monopolies: what it takes to dominate the 21st century economy. St. Martin’s Press.
Moszoro, M. W. (2018). Public–Private monopoly. The B.E. Journal of Economic Analysis & Policy, 18(2). https://doi.org/10.1515/bejeap-2016-0314.
Teachout, Z. (2020). Break’em up: Recovering our freedom from big ag, big tech, and big money. All Points Books.
Dr. Chris Drew is the founder of the Helpful Professor. He holds a PhD in education and has published over 20 articles in scholarly journals. He is the former editor of the Journal of Learning Development in Higher Education. [Image Descriptor: Photo of Chris]