If you've ever played the classic board game Monopoly, you'll know that throughout the length of the game your goal is to try to own all sets of properties to set high prices. This is mimicking the idea of a monopoly market: when there is only one seller of a product that cannot be substituted for another product, the seller can control the price of his market.
One Producer or Seller
In order for a monopoly to exist, there must be a single seller of a single product. There can be an infinite number of buyers but if there is more than one seller the market is not a monopoly. This is because for a monopoly to exist a seller must have complete control over the price and distribution of a product and this happens when competition is eliminated. In a competitive market prices are influenced by multiple sellers competing for a sale. To get a sale they may lower prices, causing other sellers to lower prices so they do not lose sales.
In order for a monopoly to exist the market must be restricted so that only one seller can profit from a product. If the market was not regulated other sellers would enter the market to compete for profit. One type of market restriction is large scale production of the product, which leads to lower costs for selling the product. A new firm will be discouraged from investing in producing the product because they will need to spend money on factories in order to make a profit. Other restrictions are government patents or a seller having exclusive ownership of a key resource.
Another key characteristic of a monopoly market is that the product being sold must be original and unique. There cannot be legitimate substitutes or knockoffs of the product which buyers could buy from other sellers at discount prices. If there were legitimate substitutions for the product then the market would become competitive again, meaning the seller would need to give reasons why buyers must purchase the original product for an expensive price.
Types of Monopolies
There are three main types of monopoly market: the natural monopoly market, the local monopoly market and the regulated monopoly market. A natural monopoly market happens when competitors do not have the money to invest in a substitute product that would compete with the original product. This means competitors are not being legally restricted but are restricted financially and in resources. Local monopolies tend to happen in poor remote areas because buyers cannot afford to travel a long distance in order to purchase a competitor's product. Regulated markets exist when the government has control of different products and restrictions. Markets restricted by government patents would fall into this category.