What is a monopoly?

By technical definition a monopoly is a firm which holds 100% of a market, however in the UK the competition authorities define a legal Monopoly as a firm holding over 25% power within a market. Monopolies are often price setters, but can be quantity setters (never both simultaneously). Monopolies have three main characteristics. Firstly that there is only one dominant firm in the market, secondly that high barriers to entry prevent new firms from entering the market and lastly that they sell differentiated products. Monopoly power is normally established and held due to barriers to entry - exmaples of which being vast economies of scale, legal barriers (such as patents), brand identity and sunk costs. It is worth noting that not all monopolies share all common characteristics, but they experience downward sloping demand. There is a special type of monopoly, called 'Natural Monopolies'. These are Monopolies where average costs are continually falling - usually due to huge sunk costs initially, however as firm expands marginal costs always fall. An example would be rail networks where it would make no sense for a competing firm to enter a market as it would need to build all the same infrastructure - the huge sunk cost.