What is a Monopoly?
A monopoly industry is an industry with only one seller, or in which one seller dominates the industry. Typically a monopoly firm is a large company that sells a product for which there are no close substitutes.
Reasons for Monopoly Forming
Monopolies or near monopolies typically develop because of one of more of the following:
1. Legal barriers.
The government prohibits competitors from entering the market. For example, gas and electric, cable television and Internet companies, and the United States Postal Service are given exclusive rights to supply their product in the market.
2. Patents and copyrights.
The government provides a company the sole rights to supply a product or a component of a product, which is patented or copyrighted. Patents and copyrights protect companies’ innovations that have been expensive to research, develop, and market.
Governments require licenses by, for example, lawyers, doctors, accountants, and taxi drivers in order to protect consumers, as well as suppliers.
4. Trade restrictions.
Governments impose tariffs, quotas, and other import restrictions to protect domestic producers.
5. Exclusive ownership of resources.
Some companies, such as the DeBeers diamond company, own most of the resources to supply the product. This serves as a barrier to entering the industry.
6. Economies of scale.
In some industries, large firms can produce at a lower average cost than smaller firms. The lower average cost allows the larger firm to be more profitable and expand at a faster rate than smaller firms. Frequently, the larger firm acquires smaller firms and eventually takes control of the market.
The Two Types of Monopolies
Reasons 1 through 4 above are government-imposed barriers to entering an industry. Reason 5 and 6 are market conditions that encourage monopoly forming. Therefore, we distinguish between these two types of monopolies:
1. Government-granted monopolies
2. Free market monopolies
Government-granted monopolies include utility companies, such as large electricity companies. These companies are often the sole providers of natural gas and electricity within a certain region.
Another example of a government-granted monopoly is the United States Postal Service, which has a monopoly in delivering first class letters. Local telephone companies, cable service providers, Amtrak, and the major professional sports leagues are also government-granted monopolies. In general, government-granted monopolies have less incentive to innovate. They usually do not provide the best and most-efficient service to their customers, because they face no competition and have no incentive to cut costs. If they incur a loss, the government often provides financial assistance.
Professionals, such as doctors, dentists, and lawyers, are officially part of the free market. However, they have received support from government legislation to restrict entry into their profession by making it more difficult for newly aspiring doctors, dentists, or lawyers to obtain licenses. This gives existing professionals a considerable amount of monopoly power.
Another government granted-monopoly is the government itself. The government provides many services (issuing driver’s licenses and car registrations, operating parks, administrating a retirement system (Social Security) and health care system (Medicaid and Medicare), creating laws and controlling facilities usage for which there is no competition. The political party system in the United States, practically speaking, consists of only two parties (called a duopoly). This does not provide voters much choice, and results in a tendency for the two political parties to be inefficient and ineffective. Many other countries around the world have a multiple party system (10 or more). Parties in this system face much stiffer competition and are encouraged to operate more effectively. In addition, citizens can vote for a party that is much closer to their actual beliefs. To create a ruling majority, parties agree to work together and form a coalition.
Some people claim that the public school system in the United States is a monopoly. There are private schools, but because of the high price, this option is not available for most families. Parents in a certain district are told by their local government that their children are required to attend the school in their district. Few exceptions are made. Some households move to another district if they don’t like the school in their old district. However, the school board can redraw the school district lines at will. This lack of choice and lack of competition is one of the main contributors to the relatively low quality of education in most public school districts. If you are shopping for a computer, and the only store at which you can shop is the Best Buy on Main Street (because that is the only computer store allowed by the local government in your area), how would you feel?
Free market monopolies include companies, such as Google, which hold a dominant position in the Internet search industry. The DeBeers company has dominated the wholesale diamond industry for years. Some newspaper companies have obtained a local monopoly position in certain regional areas.
Free market monopolies have earned their dominant status through efficient economic practices and economies of scale. They have grown large because of innovation and cost-cutting. Because there is still the threat of competition, a free market monopoly has to remain efficient, continue to innovate, and keep prices low. If it does not, it will lose its status as the dominant power in the industry.
Despite these firms’ value to the economy, they often come under attack. Many people criticize Google, Microsoft and Walmart for being too big and too dominant and for abusing their monopoly position by imposing anti-competitive rules. Microsoft has been taken to court multiple times, and Google has come under fire for exploiting its monopoly position in the Internet search market. If these firms apply rules that unethically or illegally stifle competition or hurt workers or consumers, then the legal system must intervene. If no violations take place, should large firms be punished simply because of their size alone? Whether you personally prefer their products or not, they have worked hard to achieve success in the market, are employing large amounts of workers at competitive wages, and are providing a service that satisfies consumers’ needs (otherwise, they wouldn’t be this successful).