A monopoly does not have to be big, only alone
Picture a monopoly and you probably imagine a giant corporation. Size has nothing to do with it. The word joins Greek roots for alone and to sell, and a tiny firm can hold one if it is the only supplier in a small market with no good substitutes, free to charge far more than its goods cost to make.
Economists sort markets into four basic types: perfect competition, monopolistic competition, oligopoly and monopoly. A pure monopoly means one seller and no close alternatives, so the company effectively is the industry. Monopolistic competition allows many sellers who still hold some pricing power, while in an oligopoly a few firms watch and react to one another. The mirror image of a monopoly is a monopsony, a market with just one buyer. A cartel differs again, being several suppliers colluding on prices.
Even a monopolist cannot charge anything it likes. It faces the whole market's demand, so raising the price means selling less, and selling more means cutting the price. It chooses the point where the extra revenue from one more unit just equals the extra cost. It may also charge different prices to different groups, selling cheaply where buyers are price sensitive and dearly where they are not. Economists gauge the resulting market power with a measure called the Lerner index.
What keeps rivals out are barriers to entry, which come in economic, legal and deliberate forms. Economies of scale mean a big incumbent's costs per unit keep falling, so smaller newcomers cannot match its prices. Huge upfront research or equipment costs deter entrants. Network effects make a product more valuable the more people use it, a force credited with keeping Microsoft Office and Windows dominant on personal computers. Patents and copyrights grant legal monopolies, and controlling a vital raw material can do the same.
Some firms play rough. An incumbent may deliberately set prices low for a while, giving up profit to starve newcomers, a tactic called entry limit pricing. Others collude or lobby. Many countries have competition laws, though holding a dominant position is often legal in itself; it is abusive conduct that draws penalties. Governments also create monopolies on purpose, whether to reward risky investment or by running a state-owned company.
Source: Monopoly
