What Is a Monopoly? Types, Regulations, and Impact on Markets

Monopolistic Competition
Multiple sellers in an industry sector with similar substitutes are defined as having monopolistic competition. Barriers to entry are low, and the competing companies differentiate themselves through pricing and marketing efforts.
Their offerings are not perfect substitutes, such as Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons.
The Natural Monopoly
A natural monopoly develops in reliance on unique raw materials, technology, or specialization. Companies that have patents or extensive research and development costs such as pharmaceutical companies are considered natural monopolies.
Public Monopolies
Public monopolies provide essential services and goods, such as the utility industry as only one company commonly supplies energy or water to a region. The monopoly is allowed and heavily regulated by government municipalities and rates and rate increases are controlled.
Pros and Cons of a Monopoly
Without competition, monopolies can set prices and keep pricing consistent and reliable for consumers. Monopolies enjoy economies of scale, often able to produce mass quantities at lower costs per unit. Standing alone as a monopoly allows a company to securely invest in innovation without fear of competition.
Conversely, a company that dominates a sector or industry can use its advantage to create artificial scarcities, fix prices, and provide low-quality products. Consumers must trust that a monopoly operates ethically due to limited or unavailable substitutes in the market.
Regulation of a Monopoly
Antitrust laws and regulations are in place to discourage monopolistic operations, protect consumers, and ensure an open market.
In 1890, the Sherman Antitrust Act was passed by the U.S. Congress to limit "trusts," a precursor to the monopoly, or groups of companies that colluded to fix prices. This act dismantled monopolies including Standard Oil Company and the American Tobacco Company.23
The Clayton Antitrust Act of 1914 created rules for mergers, corporate directors, and listed practices that would violate the Sherman Antitrust Act, and the Federal Trade Commission Act created the Federal Trade Commission (FTC), which, along with the Antitrust Division of the U.S. Department of Justice, sets standards for business practices and enforces the two antitrust acts.4
The most consequential monopoly breakup in U.S. history was that of AT&T. After controlling the nation's telephone service for decades as a government-supported monopoly, AT&T fell to antitrust laws. In 1982, AT&T, which had telephone lines that reached nearly every home and business in the U.S., was forced to divest itself of 22 local exchange service companies, the main barrier to competition.
What Companies Have Faced Antitrust Violations as a Monopoly?
In 1994, Microsoft was accused of using its significant market share in the personal computer operating systems business to prevent competition and maintain a monopoly. Using Antitrust legislation, Microsoft was accused of "using exclusionary and anticompetitive contracts to market its personal computer operating system software. By these contracts, Microsoft has unlawfully maintained its monopoly of personal computer operating systems and has an unreasonably restrained trade."
A federal district judge ruled in 1998 that Microsoft was to be broken into two technology companies, but the decision was later reversed on appeal by a higher court. Microsoft was free to maintain its operating system, application development, and marketing methods.5
What Is Price Fixing?
Price fixing is an agreement among competitors to raise, lower, maintain, or stabilize prices or price levels. Antitrust laws require that each company establish prices and other competitive terms on its own, without agreeing with a competitor. Consumers make choices about what products and services to buy and expect that the price has been determined based on supply and demand, not by an agreement among competitors.6
How Do Antitrust Laws Protect Consumers?
Antitrust cases can be prosecuted by state or federal governments. Consumers who suspect a company is violating antitrust laws can contact the Antitrust Division or Federal Trade Commission at the federal level. A local company operating within one state can be investigated by the Attorney General of the state.
The Bottom Line
A monopoly is defined as a single seller or producer that excludes competition from providing the same product. A monopoly can dictate price changes and creates barriers for competitors to enter the marketplace. Antitrust legislation is in place to restrict monopolies, ensuring that one business cannot control a market and use that control to exploit its customers.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >>