In economics, monopoly power (often called market power) is the ability of a firm to raise prices above the competitive level without losing all its customers to competitors. While a "pure monopoly" implies a single seller controls 100% of a market, monopoly power is a spectrum. A firm does not need to be the only seller to have it; it just needs enough dominance to influence the price of its product rather than taking the market price as given.

What is Monopoly Power?

In a perfectly competitive market, firms are "price takers"—they must sell at the market price or sell nothing.

A firm with monopoly power is a "price maker." It faces a downward-sloping demand curve, meaning it can choose to reduce its output quantity to create scarcity, allowing it to charge a higher price

• The Metric: Economists often measure this power by how much price exceeds the marginal cost (the cost to produce one more unit).7
• The Result: The firm earns supernormal profits (profits above what is needed to keep the firm in business) while consumers pay higher prices and get fewer goods than they would in a competitive market.

2. Where Does Monopoly Power Come From?

Monopoly power originates from the absence of close substitutes for a product. If consumers have nowhere else to go when prices rise, the firm has power. This situation usually arises from three main sources:

A. Structural/Natural Sources

• Economies of Scale (Natural Monopoly): In industries with massive fixed costs (like tap water, railways, or electricity grids), it is cheaper for one large firm to supply the entire market than for two smaller firms to compete. The first firm to grow large achieves lower average costs that new entrants cannot match.
• Control of Essential Resources: If one firm owns the only source of a key input (e.g., a specific mine for rare earth minerals), it naturally holds monopoly power over the final product.

B. Legal/Government Sources

• Intellectual Property (Patents & Copyrights): Governments grant temporary monopolies to encourage innovation. If a pharmaceutical company invents a new drug, a patent bans others from selling that same drug for a set period, granting the inventor monopoly power.
• Licenses and Franchises: Governments sometimes explicitly grant a single firm the right to operate, such as a local bus route or a casino license.

C. Strategic Sources

• Product Differentiation: By convincing consumers that their product is unique (through branding, quality, or features), firms reduce the substitutability of their product. Apple, for instance, has monopoly power within the "iOS ecosystem" because an iPhone user cannot easily switch to Android without losing access to specific apps and services.

3. How is Monopoly Power Sustained?

Monopoly power is fleeting unless the firm can prevent new competitors from entering the market to steal those high profits. This is sustained through Barriers to Entry.