Monopoly

In a competitive market, many firms compete, which keeps prices close to costs. A monopolist faces no such pressure, so it can charge higher prices and supply less than a competitive market would.

Monopolies can arise from barriers that prevent competitors from entering, such as control of a key resource, patents and other legal rights, very high start-up costs, network effects, where a product becomes more valuable as more people use it, or government licences.

For example, a company holding a patent on a unique medicine may be the only supplier for many years, allowing it to set a high price.

Monopolies can harm consumers through higher prices, less choice and weaker incentives to innovate. Competition authorities therefore watch dominant companies closely, prevent mergers that would create monopolies and act against abuses of market power. Some monopolies are tolerated or regulated, such as natural monopolies in water or electricity networks, and temporary monopolies granted by patents, which reward innovation.