Classroom Companion: Business

Definition 13.1 Monopoly
In the monopoly market, there is only one seller of the good, and there are no substi-
tutes that the buyers may choose instead. In standard microeconomic theory, the 
monopoly may then alone determine prices and maximize its revenues.
What makes this definition problematic in the digital economy is that the price of 
several of the products offered in digital monopoly markets is zero; that is, there 
are no revenues generated by the customer in these markets. Some of the most 
lucrative companies in the digital economy are monopolies in one or more of their 
market segments offering services free of charge (e.g., Facebook and Google). 
Analyzing these markets using supply-demand curves is meaningless since the mar-
ginal cost of these goods are zero and, hence, independent of the volume of pro-
duction (see 
7
Chap. 
6
).
We may distinguish between three types of monopolies:
5
That a company is a de jure monopoly means that the company is protected 
against competition by law.
5
That a company is a natural monopoly implies that the market is best served by a 
single supplier rather than being shared among several suppliers; for example, if 
the market is shared by several companies, the prices of the good may be higher 
(and production less effective) than if the market is served by only one company.
5
That a company is a de facto monopoly means that the company has captured 
almost the whole market and that the barrier to entry is so high that new 
entrants are discouraged to try.
Natural monopolies and de facto monopolies are often considered to be the same 
thing. However, the two market types are different. The provider of the fixed tele-
communications infrastructure may be a natural monopoly since it may be more 
expensive for the users if there are two or more competing providers offering identi-