A monopoly exists when a single firm dominates a market with no close substitutes, granting it price-setting power. Unlike competitive markets, which force firms to optimize efficiency and maintain quality to attract consumers, a monopolist faces no immediate market pressure from competitors. The firm's behavior is guided primarily by profit maximization and long-term strategic considerations.
The hypothesis that a monopoly must degrade quality over time is not strictly mandated by economic theory, but there are several forces that can incentivize quality reduction:
- Cost Minimization Incentive: