monopoly

enUK
Related to monopoly: monopoly money

Monopoly

An economic advantage held by one or more persons or companies deriving from the exclusive power to carry on a particular business or trade or to manufacture and sell a particular item, thereby suppressing competition and allowing such persons or companies to raise the price of a product or service substantially above the price that would be established by a free market.

In a monopoly, one or more persons or companies totally dominates an economic market. Monopolies may exist in a particular industry if a company controls a major natural resource, produces (even at a reasonable price) all of the output of a product or service because of technological superiority (called a natural monopoly), holds a patent on a product or process of production, or is otherwise granted government permission to be the sole producer of a product or service in a given area.

U.S. law generally views monopolies as harmful because they obstruct the channels of free competition that determine the price and quality of products and services that are offered to the public. The owners of a monopoly have the power, as a group, to set prices, to exclude competitors, and to control the market in the relevant geographic area. U.S. antitrust laws prohibit monopolies and any other practices that unduly restrain competitive trade. These laws are based on the belief that equality of opportunity in the marketplace and the free interactions of competitive forces result in the best allocation of the economic resources of the nation. Moreover, it is assumed that competition enhances material progress in production and technology while preserving democratic, political, and social institutions.

History

Economic monopolies have existed throughout much of human history. In England, a monopoly originally was an exclusive right that was expressly granted by the king or Parliament to one person or class of persons to provide some service or goods. The holders of such rights, usually the English guilds or inventors, dominated the market. By the early seventeenth century, the English courts began to void monopolies as interfering with free of trade. In 1623, Parliament enacted the Statute of Monopolies, which prohibited all but specifically excepted monopolies. With the Industrial Revolution of the early nineteenth century, economic production and markets exploded. The growth of capitalism and its emphasis on the free play of competition reinforced the idea that monopolies were unlawful.

In the United States, during most of the nineteenth century, monopolies were prosecuted under Common Law and by statute as market-interference offenses in attempts to stop dealers from raising prices through techniques such as buying up all available supplies of a material, which is called "cornering the market." Courts also refused to enforce contracts with harsh provisions that were clearly unreasonable restraints of trade. These measures were largely ineffective.

Government Regulation

Congress intervened after abuses became widespread. In 1887, Congress, pursuant to its constitutional power to regulate interstate commerce, passed the Interstate Commerce Act (49 U.S.C.A. § 1 et seq.) in response to the monopolistic practices of railroad companies. Although competition among railroad companies for long-haul routes was great, it was minimal for short-haul runs. Railroad companies discriminated in the prices they charged to passengers and shippers in different localities by providing rebates to large shippers or buyers, in order to retain their long-haul business. These practices were especially harmful to farmers because they lacked the volume of traffic necessary to obtain more favorable rates. Although states attempted to regulate the railroads, they were powerless to act where interstate commerce was involved. The Interstate Commerce Act was intended to regulate shipping rates. It mandated that charges be set fairly, and it outlawed unreasonable discrimination among customers through the use of rebates or other preferential devices.

Congress soon moved ahead on another front, enacting the sherman anti-trust act of 1890 (15 U.S.C.A. §§ 31 et seq.). A trust was an arrangement by which stockholders in several companies transferred their shares to a set of trustees in exchange for a certificate that entitled them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a number of major industries, destroying their competitors. The Sherman Act prohibited such trusts and their anticompetitive practices. From the 1890s through 1920, the federal government used the act to break up these trusts.

The Sherman Act provides for criminal prosecution by the federal government against corporations and individuals who restrain trade, but criminal sanctions are rarely sought. The act also provides for civil remedies for private persons who start an action under it for injuries caused by monopolistic acts. The award of treble damages (the tripling of the amount of damages awarded) is authorized under the act in order to promote the interest of private persons in safeguarding a free and competitive society and to deter violators and others from future illegal acts.

The Clayton Anti-Trust Act of 1914 (15 U.S.C.A. §§ 12 et seq.) was passed as an amendment to the Sherman Act. The Clayton Act specifically defined which monopolistic acts were illegal but not criminal. The act proscribed price discrimination (the sale of the same product at different prices to similarly situated buyers), exclusive-dealing contracts (sales on condition that the buyer stop dealing with the seller's competitors), corporate mergers, and interlocking directorates (the same people serving on the boards of directors of competing companies). Such practices were illegal only if, as a result, they materially reduced competition or tended to create a monopoly in trade.

The Federal Trade Commission Act of 1914 (15 U.S.C.A. §§ 41 et seq.) established the Federal Trade Commission, the regulatory body that promotes free and fair competitive trade in interstate commerce through the prohibition of price-fixing arrangements, False Advertising, boycotts, illegal combinations of competitors, and other methods of Unfair Competition.

Congress passed the Robinson-Patman Act of 1936 (15 U.S.C.A. §§ 13 et seq.) to amend the Clayton Act. The act makes it unlawful for any seller engaged in commerce to directly or indirectly discriminate in the sale price charged on commodities of comparable grade and quality where the effect might injure, destroy, or prevent competition unless the seller discriminated in order to dispose of perishable or obsolete goods or to meet the equally low price of a competitor.

Exemptions

Despite these legal prohibitions, not all industries and activities are subject to them. labor unions monopolize the labor force and take concerted action to improve the wages, hours, and working conditions of their members. The Clayton Act and the Norris-Laguardia Act of 1932 (29 U.S.C.A. §§ 101 et seq.) recognized that unions would be powerless without this monopolistic behavior and therefore made unions immune from antitrust laws.

A government-awarded monopoly, such as the right to provide electricity or natural gas to a region of the country, is exempt from antitrust laws. Government agencies regulate these industries and set reasonable rates that the company may charge.

Sometimes an industry is a natural monopoly. This type of monopoly is created as a result of circumstances over which the monopolist has no power. A natural monopoly may exist where a market for a particular product or service is so limited that its profitable production is impossible except when done by a single plant that is large enough to supply the entire demand. Natural monopolies are beyond the reach of antitrust laws.Special-interest industries, such as agricultural and fishery marketing associations, banking and insurance industries, and export trade associations, are also immune from antitrust laws. Major league Baseball has been exempted from antitrust laws as well.

The phenomenal popularity of the personal computer (PC) in the 1980s and 1990s catapulted Microsoft Corporation past manufacturing corporations as a preeminent business organization in the United States and the world. With the explosion of interest in the Internet in the mid-1990s, Microsoft moved aggressively to market its Internet Explorer (IE) web browser and to crush its competitor, Netscape. Having already secured a monopoly with its Windows Operating System, Microsoft seemed poised to dominate Internet software. However, in 1998, 19 state attorneys general joined the U.S. Justice Department in filing an antitrust lawsuit against Microsoft. The suit alleged that the software company forced computer manufacturers (known as original equipment manufacturers or OEMs) to license and distribute Microsoft's IE in exchange for the right to pre-install Microsoft's Windows 95 operating system on new PCs. Microsoft contended that IE was an integral part of Windows 95 and that it could not be separated without causing the operating system as a whole to malfunction. The plaintiffs argued that Microsoft was engaged in an illegal Tying Arrangement, by conditioning the purchase of a popular product (Windows 95) on the purchase of an additional, unrelated product (IE.)

The case came to trial in October 1998 before U.S. District Court Judge Thomas Pen-field Jackson, sitting without a jury. Jackson ruled for the plaintiffs in November 1999, finding that the facts fully justified the conclusion that Microsoft had sought monopoly power through illegal means. He appointed Chief Judge richard a. posner of the U.S. Court of Appeals for the Seventh Circuit to mediate the case, in hopes of bringing the bitter conflict to a quick conclusion. However, Posner could not broker a settlement, and Jackson issued his final order in April 2000. He ordered that Microsoft be split into two companies and that the companies desist from monopolistic conduct. A federal appeals court overturned this decision in June 2001. Although the panel agreed that Microsoft had engaged in monopolistic practices, it found that Judge Jackson had committed misconduct by making derogatory comments about Microsoft. The case was sent back to another district court judge, who encouraged new settlement talks. In August 2002, the U.S. Department of Justice and the states agreed to a settlement in which Microsoft did not have to split apart. Instead, Microsoft agreed to allow OEMs and consumers to add and remove access to certain Windows features and to set defaults for competing software. Microsoft also made available to software developers a host of software interfaces and tools at no charge, to allow the developers to write Windows applications.

Cross-references

Antitrust Law; Combination in Restraint of Trade; Interstate Commerce Commission; Mergers and Acquisitions; Public Utilities; Restraint of Trade.

monopoly

n. A business or inter-related group of businesses which controls so much of the production or sale of a product or kind of product to control the market, including prices and distribution. Business practices, combinations, and/or acquisitions which tend to create a monopoly may violate various federal statutes which regulate or prohibit business trusts and monopolies, or prohibit restraint of trade. However, limited monopolies granted by a manufacturer to a wholesaler in a particular area are usually legal, since it is like a "license." Public utilities such as electric, gas and water companies may also hold a monopoly in a particular geographic area since it is the only practical way to provide the public service, and they are regulated by state public utility commissions. (See: restraint of trade, license)

monopoly

the exclusive right or privilege granted to a person, company, etc., by the state to purchase, manufacture, use, or sell some commodity or to carry on trade in a specified country or area.

The term also applies where such a state of affairs arises by independent economic activity as where a dominant player buys its competitors. This raises questions of COMPETITION POLICY and in some circumstances in some states monopolies maybe prevented or be broken up. See also COMPETITION COMMISSION.

MONOPOLY, commercial law. This word has various significations. 1. It is the abuse of free commerce by which one or more individuals have procured the advantage of selling alone all of a particular kind of merchandise, to the detriment of the public.
2.-2. All combinations among merchants to raise the price of merchandise to the injury of the public, is also said to be a monopoly.
3.-3. A monopoly is also an institution or allowance by a grant from the sovereign power of a state, by commission, letters patent, or otherwise, to any person, or corporation, by which the exclusive right of buying, selling, making, working, or using anything, is given. Bac. Abr. h.t.; 3 Inst. 181.
4. The constitutions of Maryland, North Carolina, and Tennessee, declare that "monopolies are contrary to the genius of a free government, and ought not to be allowed." Vide art. Copyright; Patent.

monopoly

enUK

Monopoly

Absolute control of all sales and distribution in a market by one firm, due to some barrier to entry of other firms, allowing the firm to sell at a higher price than the socially optimal price.

Monopoly

A situation in which one company that has total or near total control of a given market. This state allows the monopolist to dictate the price most people pay in that market. For example, if one company produces 99% of the widgets sold in a country, that company can set prices because there are few other options for consumers. While monopolies are often the result of competitions, they are, by their nature, anti-competitive. Antitrust laws are in place in many countries to prevent monopolies from forming.

monopoly

A business that is the sole supplier of a particular good or service. Regulated monopolies, such as electric utilities, are generally restricted as to the returns they are permitted to earn. Other monopolies such as firms with unique products or services derived from patents, copyrights, or geographic location may be able to earn very high returns. Compare oligopoly.

monopoly

Of, relating to, or being a market in which there is a single seller of a particular good or service. For example, electric utilities nearly always operate in monopoly markets. Compare monopsony.

monopoly

a MARKET STRUCTURE characterized by a single supplier and high barriers to entry. In practice, the term ‘monopoly’ is usually given a wider interpretation, particularly within the context of COMPETITION POLICY, to cover DOMINANT FIRM situations and COLLUSION between rival suppliers. Monopoly is often depicted as an inefficient form of market organization since the lack of effective competition tends to remove the monopolist's incentive to reduce industry supply costs. Worse still, monopolists may abuse their market power both with respect to consumers (for example, by charging excessive prices), and actual and potential competitors (for example, by depriving them of market access through EXCLUSIVE DEALING practices). On the other hand, MARKET CONCENTRATION may lower industry supply costs by enabling firms to take advantage of ECONOMIES OF SCALE, and it is to be noted that governments go out of their way to encourage patent monopolies (see PATENT) as a means of encouraging innovation. See CONCENTRATION RATIO, MONOPOLY OF SCALE.

Fig. 131 Monopoly.

monopoly

A type of MARKET STRUCTURE characterized by:

one firm and many buyers: a market comprising a single supplier selling to a multitude of small, independently acting buyers;
a lack of substitute products: there are no close substitutes for the monopolist's product (CROSS-ELASTICITY OF DEMAND is zero);
blockaded entry: BARRIERS TO ENTRY are so severe that is impossible for new firms to enter the market.

In static monopoly, the monopolist is in a position to set the market price. Unlike a perfectly competitive producer (see PERFECT COMPETITION), however, the monopolist's marginal and average revenue curves are not identical. The monopolist faces a downward-sloping demand curve (D in Fig. 131 (a)), and the sale of additional units of his product forces down the price at which all units must be sold. The objective of the monopolist, like that of the competitive firm, is assumed to be PROFIT MAXIMIZATION, and he operates with complete knowledge of relevant cost and demand data. Accordingly, the monopolist will aim to produce at the price-output combination that equates MARGINAL COST and MARGINAL REVENUE. Fig. 131 (a) indicates the short-run equilibrium position for the monopolist. The monopolist will supply Q_e output at a price of P_e. At the equilibrium price, the monopolist secures ABOVE-NORMAL PROFITS. Unlike the competitive firm situation, where entry is unfettered, entry barriers in monopoly are assumed to be so great as to preclude new suppliers. There is thus no possibility of additional productive resources entering the industry, and, in consequence, the monopolist will continue to earn above-normal profits over the long term (until such time that supply and demand conditions radically change). Market theory predicts that, given identical cost and demand conditions, monopoly leads to a higher price and lower output than does perfect competition and thus may be considered to be a form of MARKET FAILURE.

Equilibrium under perfect competition occurs where supply equates to demand. This is illustrated in Fig. 131 in which the competitive supply curve is MC (the sum of all the individual suppliers’ marginal cost curves). The competitive output is Q_c and the competitive price is Pc. Since the supply curve is the sum of the marginal cost curves, it follows that, in equilibrium, marginal cost equals price. Assume now that this industry is monopolized as a result, say, of one firm taking over all the other suppliers but that each plant's cost curve is unaffected by this change, that is, there are no ECONOMIES OF SCALE or DISECONOMIES OF SCALE arising from the coordinated planning of production by the monopolist - thus marginal costs will be the same for the monopolist as for the competitive industry, and, hence, their supply curves will be identical. As noted above, the monopolist who seeks to maximize profits will equate cost not to price but to marginal revenue. In consequence, in equilibrium, the output of the industry falls from Qc to Qm and market price rises from Pc to Pm.

Moreover, the monopolist, lacking any competitive pressure to minimize cost, may produce any given level of output at unit costs that are higher than those attainable without any penalty (see X-INEFFICIENCY).

The conclusion of competitive optimality, however, rests on a number of assumptions, some of which are highly questionable, in particular the assumption that cost structures are identical for small perfectly competitive firms and large oligopolistic and monopoly suppliers, while, given its static framework, it ignores important dynamic influences, such as TECHNOLOGICAL PROGRESS.

In a static monopoly, a fundamental assumption is that costs of production increase at relatively low output levels. The implication of this is that the firm reaches an equilibrium position at a size of operation that is small relative to the market. Suppose, however, that production in a particular industry is characterized by significant economies of scale, that is, individual firms can continue to lower unit costs by producing much larger quantities. We shall illustrate this by assuming that a perfectly competitive industry is taken over by a monopolist. It is very unlikely in this instance that costs would be unaffected by the change in the scale of operations. Fig. 131 illustrates the case where the reduction in unit costs as a result of the economies of single ownership gives rise to greater output and lower price than the original perfect competition situation.

The fall in unit costs as a result of monopolization moves the marginal cost curve of the monopolist (MCm) to the right of the original supply curve (Spc) so that more is produced (Qm) at the lower price (Pm). We still make the assumption that marginal costs are rising over the relevant range of output. In the long run, this expectation follows from the proposition that, at some size, economies of large scale are exhausted and diseconomies of scale set in. The diseconomies are usually associated with the administrative and managerial difficulties that arise in very large complex organizations. There is growing evidence, however, to the effect that the long-run average cost curve (and hence MC curve) for many capital-intensive industries is L-shaped. In these industries, total demand and individual market shares, not cost considerations, are the factors limiting the size of the firm. The firm may thus grow and find a level of output such that further expansion would be unprofitable, but in doing so, it may become so large relative to the market that it attains a degree of power over price. This is not to deny that the monopolist could further increase output and lower price were he not trying to maximize his profit. Such a position would not, however, be the result of a return to perfect competition. What has happened is that the firm, seeking its best profit position, has abandoned the status of an insignificant small competitor. It has not necessarily done so through a systematic attempt to dominate the market. On the contrary, it is the underlying cost conditions of the market that have impelled this growth. In such an industry, it is possible that small ‘competitive-sized’ firms cannot survive. Moreover, to the extent that the unit costs are lower at higher production levels, the large firm is a technically more efficient entity.

The case of significant economies of scale, then, may be characterized as one in which atomistic competition becomes technically impossible and, under an efficiency criterion, undesirable. The demonstration of competitive optimality implicitly assumes away this kind of complication.

The analysis developed above also neglects dynamic aspects of the market system. According to an influential group of writers, major improvements in consumer welfare occur largely as a result of technological INNOVATIONS, that is, the growth of resources and the development of new techniques and products over time, rather than adjustments to provide maximum output from a given (static) input, and monopolistic elements function as a precondition and protection of innovating effort. Perfectly competitive firms certainly have the motivation to employ the most efficient known production techniques, since these are necessary to their survival. But their inability to sustain above-normal profits limits both their resources and incentive to develop new technology. By contrast, the pure monopolist, earning above-normal profits, will have greater financial resources to promote technical advance, but his incentive to innovate may be weak given the lack of effective competition. However, technological advance is a means of lowering unit costs and thereby expanding profits; and these profits will not be of a transitory nature, given barriers to entry. Moreover, technical superiority may itself be one of the monopolist's barriers to entry; hence, the monopolist must persist and succeed in the area of technological advance to maintain his dominant position.

One of the most important advocates of the possibility that an industry exhibiting strong monopolistic elements may employ productive techniques superior to those of its competitive counterpart was SCHUMPETER. To the extent that invention and introduction of new processes and products is centred in the large oligopolistic firm, a comparison of oligopoly/monopoly with perfect competition at a fixed technological position systematically understates the social contribution of the former.

Diagrammatically, the Schumpeterian contention may be illustrated by using Fig. 131. The competitive market produces Qpc where short-run marginal cost equals price. If this industry were monopolized, the ordinary expectation would be a price rise to Pm¹ and output decrease to Qm¹. However, if the monopolist in such an industry introduces cost-saving innovations, the entire marginal cost curve may fall so that the monopolist may actually produce more (Qm) at a lower price (Pm) than the original competitive industry, even if the monopolist fully exploits his market power.

It is, of course, possible that society will remain worse off under monopoly, even if the monopoly innovates; the benefits of innovation may not outweigh the costs of monopolistic exploitation. See alsoOLIGOPOLY, MONOPOLISTIC COMPETITION, DISCRIMINATING MONOPOLY, COMPETITION POLICY, CONSUMER SURPLUS, CONCENTRATION MEASURES, REVISED SEQUENCE.

monopoly

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have a monopoly on (something)

Monopoly money

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Bibliography

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History

Government Regulation

Exemptions

Further readings

Cross-references

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Synonyms for monopoly

noun exclusive control or possession

Synonyms

Words related to monopoly

noun (economics) a market in which there are many buyers but only one seller

Related Words

noun exclusive control or possession of something

Related Words

noun a board game in which players try to gain a monopoly on real estate as pieces advance around the board according to the throw of a die

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