The Economist defines monopoly as a situation when the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. (See Market Power.)
The Economist goes on to say:
“Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.
“In practice, few monopolies are absolute, and their power to set prices or limit supply is constrained by some actual or potential near-competitors. An extreme case of this occurs when a single firm dominates a market but has no pricing power because it is in a contestable market; that is if it does not operate efficiently, a more efficient rival firm will take its entire market away. Antitrust policy can curb monopoly power by encouraging competition or, when there is a natural monopoly and thus competition would be inefficient, through regulation of prices. Furthermore, the mere possibility of antitrust action may encourage a monopoly to self-regulate its behaviour, simply to avoid the trouble an investigation would bring.”
Atlas topic, subject, and course
The Economist, Monopoly, Economics A-Z, at http://www.economist.com/economics-a-to-z/m#node-21529731, accessed 7 May 2016.
Page created by: Ian Clark, last modified 7 May 2016.