Monopolies, Duopolies, and Oligopolies

In a monopoly, a single firm produces the entire market supply of a good or service. In a duopoly, there are two such firms, and in an oligopoly, a handful of firms produce all or nearly all of the market supply. Thus, monopolies, duopolies, and oligopolies all represent market structures that deviate from perfect competition, and for duopolies and oligopolies, production decisions by any single firm directly affect the sales or selling prices of other firms.

As with all market structures that deviate from perfectly competitive markets, profit-maximizing firms in these markets tend to restrict outputs in their efforts to increase prices above marginal costs and, thereby, reduce the efficiency of the marketplace. From a society-wide perspective, the higher price and restricted output misallocate resources and ...