Glossary · Economic ideas

Monopoly

A monopoly is a market with a single seller. With no rivals to undercut it, it can charge more and sell less than a competitive market would.

Also called: monopolist, market power, natural monopoly, oligopoly

In plain words

Think of the only snack bar inside a stadium. You can’t step out for a cheaper hot dog, so it charges $9 instead of $3 and still sells plenty. A seller with no rivals is a monopoly.

In a market with many sellers, a shop that raises its price loses customers to the shop next door. A monopoly doesn’t: buyers either pay its price or go without. So it sets a higher price and sells less than a competitive market would, and some buyers who would have paid a fair price are left out.

Pure monopolies are rare. More common are markets with a few big sellers (an oligopoly) or one dominant firm. Economists call the power to raise prices without losing most customers market power.

With many sellers, competition holds the price near cost; a single seller can set it higher.

Example

One gym in town

A town’s only gym knows that 100 people would join at $20 a month, but only 60 at $40. Serving a member costs it $10 a month.

At $20: 100 members × $10 profit each = $1,000 a month.
At $40: 60 members × $30 profit each = $1,800 a month.
With no rival in town, the owner picks $40. Forty people who would gladly pay $20, more than the $10 it costs to serve them, are left out.
If a second gym opens, $40 stops working: the newcomer can win members with a lower price.

A monopoly can earn more by selling less at a higher price. The value lost by the 40 people left out is what economists call the deadweight loss of monopoly.

One level deeper

Monopolies arise in a few ways: a resource only one firm controls (De Beers once controlled most of the world’s rough diamonds), economies of scale so large that one firm is cheapest (a network of water pipes), network effects, patents and copyrights, or a government license.

Some monopolies are allowed on purpose. A patent gives an inventor a temporary monopoly (in the US as of 2026, usually 20 years from filing) as the reward for inventing. Utilities are often monopolies whose prices are set by a regulator.

Most countries have competition laws (antitrust laws, in the US) against firms that abuse market power. In 1911 the US Supreme Court ordered the breakup of Standard Oil, which had controlled most of America’s oil refining.

Why it matters

Monopolies mean higher prices, fewer choices and often slower innovation for buyers.

Market power is also why some companies earn high profits for decades, and why their size draws the attention of regulators.

Competition, the opposite, is what pushes prices down toward cost.

A common mistake

Myth: Big companies are monopolies.

In fact: Size is not the test. A huge company with many strong rivals has little power over prices, while a small firm can be a monopoly in its town. What matters is whether buyers have real alternatives.

Questions people ask

What is a natural monopoly?

An industry where one firm can serve the whole market more cheaply than two could, usually because of huge fixed costs: water pipes, power lines, railroad tracks. Such firms are often regulated.

What is the difference between a monopoly and an oligopoly?

A monopoly has one seller. An oligopoly has a few large ones, like the airlines on many routes, which watch each other’s prices closely.

Are monopolies illegal?

Being a monopoly is usually not illegal in itself, for example after building a better product. Getting or keeping one by unfair means, such as fixing prices with rivals or blocking competitors, is illegal in most countries.

About the numbers

This page explains a term. It is not investment advice.