The Definition of Monopoly Profit

A monopolistic economy is one in which a particular business controls the sale of certain goods by creating “barriers to entry” for other firms in the market. For example, if Apple were the only company to manufacture computers, it would hold a monopoly. Because monopolies do not face regular competition, they can set prices and product values, thus essentially guaranteeing economic and accounting profits. What they are left with, then, is a monopoly profit.

The Nature of Monopoly

The absence of competition in a monopoly allows companies to raise prices to levels much higher than they would be in a competitive market. These price points are somewhat dictated by consumer demand, but the very nature of monopoly itself essentially forces consumers to purchase products from that particular company, as other choices are either limited or nonexistent. Additionally, monopolists will often limit production of certain goods to increase consumer demand, allowing them to raise prices further.

Profit Control

Monopoly prices are set to achieve maximum profit, which is determined by the intersection of the “optimum output” ratio (in which the cost of production is equal to the revenue) and the trends in consumer demand. Once this price is calculated, it should be greater than the original cost of producing the goods or services, and will not be affected by competitive pricing from other companies. As a result, when consumers purchase the particular product in question, a monopoly profit will be generated for the company.

The Role of Government

While the idea of a monopoly might be appealing to many companies seeking to control and guarantee profit, most free-market economies are designed to discourage this. In regulated economies, for instance, governments will not permit companies to charge above the marginal cost (i.e. the cost of producing one unit of goods). This rule allows businesses to profit in the short term, but does not allow for monopoly profits over sustained periods of time. Even when so-called natural monopolies are permitted, governments will often require pricing oversight and regulation.

Long-Term vs. Short-Term Monopolies

In a competitive market (as in the United States), there are no barriers to entry and therefore no sustained monopoly profits. However, it is possible for a company to maintain a short-term monopoly after it introduces a new product to the market. At this point, before consumer demand incites competition, that company can set the price of the product and ensure a monopoly profit until similar products are available at lower costs. At this point, supply will exceed demand, and the initial company will move back toward a zero profit margin.

Exceptions

In certain unique situations, a long-term monopoly in a regulated economy can be possible. For example, when an organization secures a patent for a particular technology, or when a company holds the wealth of a certain environmental resource, a monopoly profit can be maintained for an extended period of time. This was the case, for instance, with the Alcoa Aluminum firm, which controlled all sources of bauxite in the United States, and therefore was granted a “natural monopoly.”

Short-term monopolies and monopolized profits can be a natural part of any competitive market system. However, in a free-market economy, if a company is perceived to be setting up deliberate and unfair barriers to other companies seeking to enter the market, the government will step in to ensure fair buying and selling practices and reduce the chances of an extended monopoly.