Types of Monopoly
There are four main categories of monopoly, organized by the source of their market power: natural monopoly, government-granted monopoly, barriers-to-entry monopoly, and technological monopoly.
Main Categories
- Natural Monopoly — a market structure where a single firm can supply the entire market at a lower cost than multiple firms, distinguished by high fixed costs and low marginal costs, as seen in the case of Pacific Gas and Electric Company, which provides electricity to much of Northern California.
- Government-Granted Monopoly — a market structure where the government grants a single firm the exclusive right to provide a good or service, often in exchange for a fee or other consideration, as seen in the case of De Beers, which was granted a monopoly over the diamond market in South Africa by the government.
- Barriers-to-Entry Monopoly — a market structure where a single firm has erected barriers to prevent other firms from entering the market, such as through strategic acquisitions or patent protection, as seen in the case of Microsoft, which used its control over the Windows operating system to limit competition in the software market.
- Technological Monopoly — a market structure where a single firm has developed a proprietary technology that gives it a significant advantage over its competitors, such as Google's search algorithm, which allows it to dominate the search engine market.
Comparison Table
| Category | Source of Market Power | Example | Duration of Monopoly |
|---|---|---|---|
| Natural Monopoly | High fixed costs, low marginal costs | Pacific Gas and Electric Company | Indefinite |
| Government-Granted Monopoly | Government grant | De Beers | Until government revokes grant |
| Barriers-to-Entry Monopoly | Strategic acquisitions, patent protection | Microsoft | Until barriers are breached |
| Technological Monopoly | Proprietary technology | Until technology becomes obsolete |
How They Relate
The categories of monopoly are not mutually exclusive, and firms may hold multiple types of monopoly power simultaneously. For example, a firm with a technological monopoly may also erect barriers to entry to prevent other firms from developing similar technologies. Government-granted monopolies may also be natural monopolies, as in the case of a utility company that is granted a monopoly over a particular market due to its high fixed costs and low marginal costs. Specific pairs of categories, such as natural monopoly and government-granted monopoly, are commonly confused, but can be distinguished by the source of the firm's market power. Barriers-to-entry monopoly and technological monopoly may also overlap, as a firm with a proprietary technology may use that technology to erect barriers to entry and prevent other firms from competing.