# Understanding Monopoly: Its Types, Market Impact, and Regulatory Measures

> **Definition**
>
> A monopoly is a market structure characterized by a single seller or producer that dominates an industry.

## What Is a Monopoly?

 A monopoly is a market structure with a single dominant seller in a particular industry. Monopolies limit competition and consumer choice, and are typically discouraged in free-market economies. In the United States, laws enacted to restrict monopolies are intended to ensure that a single business is unable to control a market and take advantage of customers.

### Key Takeaways

*   Monopolies exist when a single company dominates a market or industry, limiting competition and consumer choices by controlling supply and prices.
*   Antitrust laws in the United States, such as the Sherman Antitrust Act and Clayton Antitrust Act, are designed to prevent monopolistic practices and promote fair competition.
*   Monopolies can be categorized into different types, including pure monopolies, monopolistic competition, natural monopolies, and public monopolies, each with unique characteristics and regulatory implications.
*   While monopolies benefit from economies of scale and stable pricing, they can also lead to unfair practices, such as quality reduction and price fixing, due to a lack of competition.
*   Historical antitrust cases, like those involving Standard Oil, AT&T, and Microsoft, demonstrate the government's efforts to protect consumers and maintain competitive markets.

![Monopoly](https://www.investopedia.com/thmb/UsEIfbpY2pCL_B74UUOp8qVprjo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_monopoly-fa34a19571eb4168876f3a6947aa1a6f.jpg)

*— Investopedia / Jessica Olah*

## How Monopolies Operate and Their Market Influence

A monopoly exists when one company dominates a market, facing no competition or close substitutes. Monopolies can dictate price changes and create barriers for competitors to enter the marketplace.

Companies achieve monopoly status by controlling the full supply chain or buying out competitors.

Monopolies often benefit from [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp), allowing them to produce more at lower costs per unit.  

## Exploring Different Types of Monopolies

### The Pure Monopoly

A pure monopoly has one seller dominating a market, with high entry barriers like steep startup costs. There are no substitutes for the product sold by the seller.

Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems. As of May 2024, its desktop Windows software still held a market share of more than 73%.

### Monopolistic Competition

Multiple sellers in an industry sector with similar substitutes are defined as having [monopolistic competition](https://www.investopedia.com/terms/m/monopolisticmarket.asp). Barriers to entry are low, and the competing companies differentiate themselves through pricing and marketing efforts.

Their offerings are not perfect substitutes, as with Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons.

### The Natural Monopoly

A [natural monopoly](https://www.investopedia.com/terms/n/natural_monopoly.asp) develops from reliance on unique raw materials, technology, or specialization. Companies with [patents](https://www.investopedia.com/terms/p/patent.asp) or extensive research and development costs, like pharmaceutical companies, are considered natural monopolies.

### Public Monopolies

Public monopolies, such as the [utility industry](https://www.investopedia.com/articles/investing/022516/worlds-top-10-utility-companies.asp), provide essential services and goods. Only one company commonly supplies energy or water to a region. The monopoly is allowed and heavily regulated by government municipalities. Rates and rate increases are controlled.

## Advantages and Disadvantages of Monopolies

### Pros

*   Without competition, monopolies can set prices and keep pricing consistent and reliable for consumers.
*   Monopolies enjoy economies of scale and often are 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.

### Cons

*   A company that dominates a sector or industry can [use its advantage](https://www.investopedia.com/ask/answers/032615/are-monopolies-always-bad.asp) to create artificial scarcities, [fix prices](https://www.investopedia.com/terms/f/fixing.asp), and provide low-quality products.
*   Due to limited or unavailable substitutes in the market, consumers have no option but to trust that a monopoly operates ethically.  
    

## Regulations Governing Monopolies

[Antitrust](https://www.investopedia.com/terms/a/antitrust.asp) laws and regulations are in place to discourage monopolistic operations, protect consumers, and ensure an open market.

In 1890, the [Sherman Antitrust Act](https://www.investopedia.com/terms/s/sherman-antiturst-act.asp) was passed by the U.S. Congress to limit trusts, a precursor to monopolies or groups of companies that conspired to fix prices. This act dismantled monopolies, including the Standard Oil Company and the American Tobacco Company.

The [Clayton Antitrust Act](https://www.investopedia.com/terms/c/clayton-antitrust-act.asp) of 1914 created rules for mergers and corporate directors. It listed practices that would violate the Sherman Antitrust Act. The Federal Trade Commission Act created the [Federal Trade Commission (FTC)](https://www.investopedia.com/terms/f/ftc.asp). The FTC, along with the Antitrust Division of the U.S. Department of Justice, sets standards for business practices and enforces the two antitrust acts.

### Antitrust Regulations in Action

**AT&T**

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 had to divest 22 local service companies, as they were the main barriers to competition.

**Microsoft**

In 1994, Microsoft was accused of using its significant [market share](https://www.investopedia.com/terms/m/marketshare.asp) in the personal computer operating systems business to prevent competition and maintain a monopoly.

Authorities claimed that the company was "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 unreasonably restrained trade."

In 1998, a federal district judge ruling called for the split of Microsoft into two companies, but the decision was later overturned. Microsoft was free to maintain its operating system, application development, and marketing methods.

## What Is the Monopoly Meaning?

A monopoly is represented by a single seller who sets prices and controls the market. The high cost of entry into that market restricts other businesses from taking part. Thus, there is no competition and no product substitutes.

## 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 independently, without consulting a competitor. Consumers expect that prices have been determined based on supply and demand, not by an agreement among competitors.

## How Do Antitrust Laws Protect Consumers?

Antitrust cases can be brought against companies who violate antitrust laws and prosecuted by state or federal governments. This can discourage other companies from behaving in ways that violate such laws and harm consumers. 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 that state.

## The Bottom Line

A monopoly is characterized by a single seller or producer controlling a market for a product. This scenario limits consumer choices and competition. Monopolies can dictate prices and create barriers that make it difficult for other companies to enter the market. Antitrust laws such as the Sherman Antitrust Act and regulatory bodies such as the Federal Trade Commission protect consumer interests by monitoring monopolistic practices to prevent monopolies from establishing themselves.  

> **Article Sources**
>
> 1.  GlobalStats. "[Desktop Operating System Market Share Worldwide](https://gs.statcounter.com/os-market-share/desktop/worldwide/)."
>     
> 2.  National Archives. "[Sherman Anti-Trust Act (1890)](https://www.archives.gov/milestone-documents/sherman-anti-trust-act)."
>     
> 3.  Federal Trade Commission. "[The Antitrust Laws](https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws)."
>     
> 4.  The New York Times. "[U.S. Settles Phone Suit, Drops I.B.M. Case; A.T.&T. to Split Up, Transforming Industry](https://www.nytimes.com/1982/01/09/us/us-settles-phone-suit-drops-ibm-case-at-t-to-split-up-transforming-industry.html)."
>     
> 5.  U.S. Department of Justice. "[Competitive Impact Statement: U.S. v. Microsoft Corporation](https://www.justice.gov/atr/competitive-impact-statement-us-v-microsoft-corporation)."
>     
> 6.  U.S. Federal Trade Commission. "[Price Fixing](https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/dealings-competitors/price-fixing)."