What Is a Monopoly?

Anyone who's ever player the popular board game Monopoly has a pretty good idea of what a monopoly is. In the board game, one of the goals is to own all of the properties of a particular color, or, in economic terms, to have a monopoly on properties of a particular color. It's also the case that, when a player has a monopoly on a set of properties, the rents on those properties go up. This is also a realistic feature of the game since it's generally true that monopolies lead to higher prices.

A monopoly is simply a market with only one seller and no close substitutes for that seller's product. Technically, the term "monopoly" is supposed to refer to the market itself, but it's become common for the single seller in the market to also be referred to as a monopoly (rather than as having a monopoly on a market). It's also fairly common for the single seller in a market to be referred to as a monopolist.

Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist. These barriers to entry exist in multiple forms, so there are a number of specific reasons that monopolies can exist.

Ownership of a Key Resource

Government Franchise

Intellectual Property Protection

Natural Monopoly

In all cases, there is a bit of ambiguity surrounding the market definition for determining whether a company is a monopolist. For example, while it is certainly true that Ford has a monopoly on the Ford Focus, it is certainly not the case that Ford has a monopoly on cars overall. The market definition question, which rests on what is considered to be a "close substitute," is a central issue in most monopoly regulation debates.