A Monopoly Case Analysis: Utility Companies

Key Features of Monopolies

A monopoly is market structure where there is only one supplier of a good. In other words, there is only one firm that produces or supplies a certain good, and buyers can only buy that specific good from that one buyer. The existence of only one seller of a good leads to the existence of market power that can be exercised by that firm. That market power translates into the fact that the monopolist firm can set the price at will (or the production output, but not both) in order to maximize its profit. This is not the case in a perfectly competitive market, where firms cannot affect price (which is considered an exogenous variable).

Situations where monopolies arise can be of various natures, but there a couple of circumstances that explain the origin of most monopolies.

First, the existence of strong entry barriers (the typical example of this is the public utilities). This is the case where the infrastructure required to start and maintain the production operation is extremely high. Or when by virtue of a certain legislation (at the city, state, or even federal government level) only one firm can supply a certain good on a certain area (it is not uncommon to find that only one cable company is allowed to serve a given geographical area).

Second, when a firm takes advantage of strong economies of scale that lead to lower cost for high volumes of production, in which case this firm can drive most or all competitors out of the market and act as a monopoly.

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