What is a Monopoly?

A monopoly occurs when one producer controls the supply of goods and services to customers. The monopoly is more effective when there is a restriction on the ability of new competitors to enter the market. This situation most commonly arises when there are regulations blocking new entrants. It may also occur on a temporary basis when a business is granted a patent on a key product, so that competitors cannot sell the same product for a period of time.

Disadvantages of a Monopoly

A business that is in a monopoly situation has a strong incentive to keep prices high, since there are no competitors who can compete on price. They do so by restricting supply, thereby artificially creating a high-priced marketplace. A business in this situation typically has poor customer service, since there is no incentive to improve its support of customer needs.

Regulations Regarding Monopolies

Some governments have a policy of restricting or breaking down monopolies. They do so by tightly restricting these organizations or by requiring them to split into a number of smaller competing companies. They may also require regulatory approval for price increases.