Monopoly refers to a market structure wherein there is only one firm in the industry. The predominant characteristics of this form of market power include the ability of being price makers, earning abnormal profits and the existence of barriers to entry to restrict other firms from entering the marketplace. This ensures that the dominant seller retains market standing.
The absence of competition in the industry means that a pure monopoly would be less concerned about utilising its resources in the most efficient and productive manner in order to achieve the lowest possible production costs. This suggests that x-inefficiency (organisational slack) is likely to exist. Additionally, private sector monopolies might exploit their market power to create artificial barriers to entry for potential rival firms. These include predatory pricing techniques, exclusive dealing contracts with suppliers, budling items and restricting capital supplies to rival businesses.
In addition to adopting restrictive practices and behaving in an anti-competitive manner, a monopoly can create artificial scarcity to further increase the market prices of its products. Since the firm is the sole trader in the industry, customers will continue to buy the product from the dominant firm, especially if the demand for its goods is price inelastic. The lack of competition for the monopoly also suggests that the firm would be less incentivised to diversify its product range than if it were operating in a competitive environment. This can limit choice for customers.
Nonetheless, not all monopolies exploit the end customers especially if they operate in a contestable market. A monopoly may face competition from overseas firms which supply similar commodities. A monopoly may be more efficient in safeguarding domestic markets than if there were smaller firms because of its large scale of production and consequent cost advantages (economies of scale). A national monopoly can withstand fierce competition from international businesses and therefore protect jobs and incomes in the country.
Furthermore, long run abnormal profits are a driving factor for monopolies to invest in research and development and retain market power. This may lead to the invention of innovative, revolutionary products that may never have been developed if the business wouldn’t have taken investment risks.
In conclusion, this form of market structure does not necessarily characterise as exploitative towards customers by restricting choice and charging excessive prices. The scale and nature of business activity is highly determining of its utility for the customers and the economy. The ability to earning supernormal profits remains a key motivator for monopolies to risk their capital by investing in speculative ventures, products and technologies.