What Is a Monopoly?

What is a monopoly?

A monopoly occurs when a single company or entity dominates a particular market, holding most, if not all, of the market share. In this case, competition is virtually nonexistent, which allows the monopolistic entity to control prices, quality, and the availability of the product or service.

If there are any alternatives at all, they might be shoddy knock-offs that really can't measure up in terms of quality. People or companies who want to use the thing you control don't have any choice -- it's your product or nothing.

By the way, this concept is not limited to the cold, hard business world. The classic Hasbro (NYSE:HAS) game is named Monopoly for good reasons. Game designer Elizabeth Magie concocted The Landlord's Game to teach the nation about the economic dangers of monopolistic business practices.

As the rulebook evolved with house rules and new board designs over time, the name changed to Auction Monopoly, and then simply Monopoly. That's how you win the game, after all: Monopolize the properties in a lucrative stretch of real estate and exploit them with houses or hotels until your customers run out of money.

More than a century after the game's original launch, Magie is still teaching the world what an economic monopoly can look like.

Why should you care about monopolies?

Understanding a monopoly goes beyond just knowing that one company is ruling the roost. The presence of this peerless market dominator can have strong implications for the company's target market, potential customers, and aspiring rivals.

• Price control: With no competition to worry about, a monopolistic company can set prices as it pleases. The price tag is only limited by what people are willing to pay for a unique product or service. Your wallet might feel the pinch with no other options available.
• Limited choices: A lack of competition can lead to limited choices for consumers. Imagine a world with only one flavor of ice cream, one car model, or a single mobile phone. That doesn't sound fun at all, but the downside doesn't stop there. What if you're allergic to the monopolistic snack, can't fit your knees behind the wheel of that unchallenged car model, or can't afford the only smartphone in the store?
• Stifled innovation: A healthy choice between several high-quality providers is always better for the consumer. Competition often spurs innovation. Without it, a monopolistic company might get a little too comfortable on its throne, hindering innovation from possible challengers without moving its own innovations forward.

Monopolies can arise for various reasons, such as government regulation, ownership of a key resource, or technological superiority. The history of monopolies reveals a complex interplay of economics, politics, and law, painting a rich picture that goes beyond simple market dominance. Aspiring to a total monopoly is human nature, but so is the desire to disrupt and reform the monopolies around us.

Understanding monopolies

Awareness of monopolies can guide your choices as an investor or consumer.

Recognizing monopolistic trends might lead to investment opportunities. If you get in on the ground floor of a company preparing to dominate a specific market for many years to come, you may have found a fantastic investment at a low price. Just be cautious; issues such as lawsuits and regulatory changes can shake that monopolistic castle.

Understanding monopolies also helps consumers notice when a single company dominates the market, and it may affect their buying decisions. Forecasting the fickle consumer market's long-term trends is about as easy and reliable as projecting the weather with a dowsing rod, but it's nice when you get it right.

Remember, not all monopolies are bad or illegal. In some cases, what started as a monopoly can light the fires of innovation and competition in a brand-new market. Still, they require careful observation and regulation to ensure a fair playing field.