Monopoly is a type of market where there is only one firm (monopolist) that supplies the good. The firm is very large, and has control of the market price (has a lot of market power).
Sources of Market Power
A monopoly has market power (the ability to set the prices higher than the marginal cost) because it has no competitors. Consumers have to either buy from the monopolist, or not have the good at all. As a result, there will be demand for the good even if the price is set high.
To maintain its market power, a monopolist has to avoid having competitions; once it has competitors, customers will no longer be willing to buy the highly-priced goods that it supplies. But how can it prevent competitors? High barriers to entry:
- Economic barriers: economies of scale, superior technologies, and large initial investments are all things that benefit the existing firm, allowing it to produce more efficiently.
- Legal barriers: patents and copy rights ensure that the monopolist is the only firm producing a good. Property rights may grant one firm the exclusive access to a certain resource.