A monopoly is a single firm that produces a product for which there is no close substitute and which dominates its market (Byrns, 1987). This means that there are no other firms that make a similar product (or service). Consequently, the monopoly firm constitutes the entire industry, and makes for a 'pure monopoly.' A buyer who wants this particular product must either buy it from the monopolist or do without it.
'Pure monopolies' are relatively rare, but they do exist (Byrns, 1987). Local electric, gas, and water utilities are good examples, since they produce a product for which there are no close substitutes. But a firm's degree of monopoly may vary among markets. For instance, the electric company has a monopoly in the production of electricity for lighting purposes, but for heating its product may compete with gas, coal, and fuel oil sold by other firms. An electric company may consequently be a 'pure monopoly' in the lighting market, but a partial one in the heating market. Similarly, railroads, buses, taxis, and airlines are not pure monopolies, but they are partial ones depending on the extent to which buyers can substitute the products/services of such industries in meeting their transportation needs.
AT&T exemplified a 'natural monopoly,' which is legally established by the federal or state government, usually when either one or both of two conditions exist within an industry: The first is if there are increasing economies of scale over a wide range of output so that one firm can supply the market more efficiently than two or more firms; the second is when unrestricted competition among firms in the industry is deemed by society as undesirable (Byrns, 1987). Hence, the government grants such monopolies an exclusive right to operate, in return for which the government may also impose standards and requirements pertaining to the quantity and quality of output, geographic areas of operation, and the prices or ra...