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What is a Monopoly in Economics? - Definition & Impact on Consumers

Chapter 7 /  Lesson 2   Transcript
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  • 0:17 What Is a Monopoly?
  • 1:23 Examples of Monopolies
  • 2:25 When Monopolies Are Okay
  • 4:14 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

In this lesson, you will learn about monopolistic markets and what a monopoly means for producers and consumers. After this lesson, you will understand why the name of one of our all-time favorite board games really makes perfect sense.

What Is a Monopoly?

Think about the last time you played the famous board game Monopoly. What was the objective of the game? Of course it was to win, but how did you win? Whichever player ultimately controlled all of the properties on the board won the game because they had achieved a monopoly on the real estate market of Atlantic City, New Jersey. Through this famous game, the Hasbro toy company has taught millions of players what a monopolistic market looks like. When a single entity - a player in the game or a firm in the real world - controls an entire market, a monopoly exists.

Generally speaking, consumers and regulators don't like monopolies. To understand why, think back on the game. What does it mean once someone has won the game, or at least has a commanding lead? It means they have all the power. They get to start setting prices, and if someone can't pay, that person loses. That power is all fun and games in the family room, but in the real world, that much pricing power can be dangerous, especially in the markets that supply important goods and services.

Examples of Monopolies

Try to think of some examples of a monopoly in today's economy. Before you do, it should be noted that while a true monopoly means there is a single producer in the market, most regulators and economists consider a monopoly an industry that has a single firm large enough to set prices without impacting demand. Any firm can set their own prices, but most of the time, if those prices are too high, consumers don't pay them and the firm either has to lower prices or shut down. In a monopoly, consumers just have to pay whatever the controlling firm wants, since they are basically the only game in town.

So, back to the guessing game - what monopolistic markets can you think of? It's hard to think of a good example of a pure monopoly, primarily because they are discouraged, and if a U.S. firm gets too close to a monopoly, the government discourages them and puts regulations in place to limit their growth. But, that doesn't happen all of the time.

When Monopolies Are Okay

The U.S. does have some industries that are given a pass when it comes to holding a monopoly. Can you think of any? There are plenty of places to get gas. Plenty of places to buy a car. Plenty of places to watch movies. But, if you have to pay your own bills, think about your power bill. Did you get to shop around for a firm to provide your electricity, or were you told which firm you had to use? What if that firm was allowed to double their prices? Could you stop using them and start using another company? Not usually.

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You are viewing lesson Lesson 2 in chapter 7 of the course:

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Economics 101: Principles of Microeconomics

11 chapters | 132 lessons | 18 flashcard sets

Ch 7. Market Structures in Economics
Ch 8. Scarce Economic Resource...

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