Many governments, however, have created public-service monopolies by laws excluding competition from an industry. What resulted were generally publicly regulated private monopolies, such as some power, cable-television, and local telephone companies in the United States. Such enterprises usually exist in areas of "natural monopoly," where the conditions of the market make unified control necessary or desirable to the public interest. Some socialists have advocated the extension of the principle of public monopoly to all vital industries, such as coal and steel, that have an immediate effect on the general welfare of the economy. By the 1990s, however, many public utilities in the United States and elsewhere were deregulated, allowing for competition and lower prices (see utility, public).
Aside from utility companies, privately controlled monopolies without state support are rare. However, the concentration of supply in a few producers, known as oligopoly, is not uncommon. In the United States, for instance, several large companies have dominated the automobile and steel industries. Since the Progressive era, the U.S. government has made most forms of monopoly, and to a lesser extent oligopoly, illegal under antitrust laws. The objective of such measures is to guarantee that price will be determined by market forces rather than by arbitrary price setting among corporations. In recent years oligopolies have grown through mergers and acquisitions. The government still grants temporary monopolies in the form of patents and copyrights to encourage the arts and sciences.
See J. Robinson, The Economics of Imperfect Competition (2d ed. 1969); D. Dewey, The Antitrust Experiment in America (1990); T. Freyer, Regulating Big Business: Antitrust in Great Britain and America, 1880-1990 (1992).
A monopoly should be distinguished from monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods.
A government-granted monopoly or legal monopoly is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic constituency. The government may also reserve the venture for itself, thus forming a government monopoly.
Other common assumptions in modeling monopolies include the presence of multiple buyers (if a firm is the only buyer, it also has a monopsony), an identical price for all buyers, and asymmetric information.
A company with a monopoly does not undergo price pressure from competitors, although it may face pricing pressure from potential competition. If a company raises prices too high, then others may enter the market if they are able to provide the same good, or a substitute, at a lower price. The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".
A monopolist can extract only one premium, and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself.
However, the one monopoly profit theorem does not hold true if there exist:
In economics, a firm facing the entire market demand curve is said to have monopoly power. This is in contrast to a price-taking firm, which operates in a negligible segment of the overall market and thus faces a demand curve with infinite price elasticity. The pricing and production choices made by these firms follow identical decision rules. That is, regardless of the type of firm, the profit maximizing price and quantity choice will equate the marginal cost and marginal revenue of production (see diagram). The key difference is in the outcome of such a rule: typically a monopoly selects a higher price and lower quantity than a price-taking firm.
There are important points for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lower, than a competitive firm follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in price discrimination. If the monopoly were permitted to charge individualized prices, the quantity produced, and the price charged to the marginal customer, would be identical to a competitive firm, thus eliminating the deadweight loss.
As long as the price elasticity of demand for most customers is less than one in absolute value, it is advantageous for a firm to increase its prices: it then receives more money for fewer goods. With a price increase, price elasticity tends to rise, and in the optimum case above it will be greater than one for most customers. The following formula gives the relation among price, marginal cost of production and demand elasticity that maximizes a monopoly profit: where (e) is the elasticity of demand. A monopoly's power is given by the vertical distance between the point at which the marginal cost curve (MC) intersects with the marginal revenue curve (MR) and the demand curve. The longer the vertical distance, (i.e., the more inelastic the demand curve) the greater the monopoly's power, and thus, the larger its profits.
The monopoly profit is its total revenue minus its total cost. Let the price it sets as a market response be a function of the quantity it produces (Q) and let its cost function be as a function of quantity . The monopoly's revenue is the product of the price and the quantity it produces. Hence its profit is:
Taking the first order derivative with respect to quantity yields:
Setting this equal to zero for maximization:
(the rate of marginal revenue is less than the rate of marginal cost, for maximization).
This procedure assumes that the monopolist knows the exact demand function.
Simulation of Monopoly Market