A monopoly exists when only one company can supply an essential product or service in a given region because of significant barriers to entryfor any competitor. The barriers can be legal, regulatory, economic, or geographic. In the absence of competitors, a monopoly company can raise its prices, restrict its production, or safely ignore customer service concerns. Let's look at some examples of monopolistic markets.
Key Takeaways
- Historic monopolies included John D. Rockefeller's Standard Oil and J.B. Duke's American Tobacco Co.
- The biggest monopoly breakup of modern times was AT&T, once the sole provider of telephone service in the U.S.
- Most utilities today operate as government-licensed monopolies.
Understanding Monopolistic Markets and Monopolies
Before we look at specific examples, let's define monopolies as there are different types. One prevalent category is the natural monopoly where a sole firm efficiently provides consumer goods or services at a lower cost than multiple competitors could achieve. This phenomenon is often observed in sectors like utilities or transportation infrastructure where the scale of operations lends itself to a more cost-effective single provider.
Geographic monopolies, on the other hand, manifest when a particular company commands control over a defined geographical area, limiting competition within that region. This dominance can stem from factors such as exclusive access to essential resources, strategic location, or historical advantages.
Another avenue here is the legal monopoly, established through government mechanisms like patents, copyrights, or licenses. These legal frameworks grant exclusive rights to individuals or organizations for a specified duration, fostering innovation by providing a temporary monopoly on certain products or processes.
Though this list is not meant to be exhausted, the last type of monopoly we'll cover is a technology monopoly. Technological monopolies are driven by a company's control over a proprietary technology or innovation that is difficult for competitors to replicate. Technology companies often establish monopolistic positions due to their ability to create, own, or control crucial intellectual property.
One last important note is the difference between a monopoly and a monopolistic market. A monopoly occurs when only one seller exists, whereas a monopolistic market occurs when one primary seller exists but others may still compete.
Monopolies are illegal if they embark on exclusionary or predatory acts.
Example of Natural Monopoly
One example of natural monopolistic markets is in the railroad industry. Because there are significant barriers to entry, it's easier for companies to historically have less competition.
In the late 19th century, the Northern Pacific Railway demonstrated characteristics of a monopoly by manipulating pricing and stifling competition. The Northern Pacific Railway had the ability to set and alter rates without fear of competition, allowing it to shape the market to its advantage. Note that Northern Pacific was brought to court for "unreasonable restraints of trade".
A more modern version of this is the Indian Railway, though this may technology be a monopoly as opposed to a monopolistic market. The Indian Railway is considered a monopoly due to being the sole provider of railway transport in the country. This monopoly arises from the fact that only one provider can operate a train on a given track at a specific time, effectively eliminating competition in the railway sector. The exclusive control over railway services by the Indian Railway allows it to dictate pricing and service terms without facing competition from other providers, and this has been a contentious issue for years.
Example of Geographic Monopoly
One historical example of a geographic monopoly is the rise of the De Beers diamond company. Founded in 1888 by Cecil Rhodes in South Africa, De Beers Consolidated Mines Ltd. quickly gained control over key diamond mines, particularly the renowned Kimberley Mine. Through strategic acquisitions and mergers, De Beers solidified its dominance in diamond production in South Africa, ultimately obtaining a significant share of the world's diamond output. It's estimated De Beers controlled somewhere around 90% of the world's diamond production and distribution.
The geographic monopoly held by De Beers had a profound impact on competition within the diamond industry. By controlling diamond mines, engaging in vertical integration, and manipulating market dynamics, De Beers limited competition and could exert power over the entire diamond industry. The company's influence extended throughout the entire diamond supply chain, from mining to trading and retail.
Over time, the dynamics of the diamond industry shifted, and regulatory pressures have influenced De Beers' monopoly. In July 2000, De Beers told a select number of client dealers and gem gutters that it would forego its monopoly and would focus its energy on boosting global demand for gems. This internal decision effectively abandoned its monopoly.
Example of Legal/Licensed Monopoly
Monopolies are sometimes permitted to exist and even exclusively licensed to provide services or products when it is seen as being in the best interest of consumers.
Utilities, for example, maintain extensive infrastructures in order to provide essential services that must be reliably available to all consumers within their business areas. A competitor would not be permitted to tap into the water company's dam or the electricity company's grid. Nor could the competitor realistically replicate the existing infrastructure to provide its own service. Thus, the utilities are effectively licensed to operate a monopoly. Their business operations and pricing policies may be subject to review and regulation by local and state governments.
The U.S. markets that operate as monopolies or near-monopolies in the U.S. include providers of water, natural gas, telecommunications, and electricity. Notably, these monopolies were actually created by government action. Economist Harold Demsetzhas pointed out these markets had no monopolistic tendencies before governments began granting exclusive rights to them. About 45 electricity companies were in operation in Chicago in 1907.
In some ways, monopolies can be good. For instance, a single company dedicated to a single purpose may allow that company to more efficiently manufacture a good or provide a service.
Example of Technology Monopoly
A classic example of a technology monopoly is Microsoft's dominance in the personal computer operating system market. In the 1990s, Microsoft's Windows operating system became the standard for most PCs, creating a near-monopoly position. The ubiquity of Windows led to a dominant market share, and its compatibility with a wide range of software and hardware made it challenging for alternative operating systems to gain traction.
Microsoft's control over the operating system market allowed the company to establish a technological monopoly as it had generated intellectual property that was far superior than any other technological advancement. This dominance extended to applications like Microsoft Office, further solidifying the company's position in the technology landscape.
The antitrust case against Microsoft in the late 1990s and early 2000s highlighted concerns about anti-competitive practices, including bundling Internet Explorer with Windows to disadvantage competing web browsers.
U.S. antitrust laws are used to prevent a company from using unfair business practices to maintain or expand a monopoly position.
Outlawed Monopolies
Monopolies can be broken up by government action. At one time, the oil industry was monopolized by John D. Rockefeller's Standard Oil and the tobacco industry was operated by J.B. Duke's American Tobacco Co. Both companies fell victim to the 1890 Sherman Antitrust Act, which outlawed monopolistic practices.
The most notorious breakup of a monopoly in modern American history occurred In 1982 with the breakup of the telecommunications company AT&T. Ma Bell, as it was then known, was the sole provider of landline telephone service to most of the U.S. It was forced to split into six regional subsidiaries, known as Baby Bells.In retrospect, the irrelevance of a monopoly on landline phone service could not have been anticipated.
Broadly, U.S. law does not punish a company for being the sole provider of a product or service, but it will punish a company for using unfair practices to maintain or expand its monopoly position.
That's how Microsoft got into trouble in the example above. The company was accused of violating antitrust regulations by trying to use its near-monopoly status as the creator of the Windows operating system to facilitate a similar domination of the internet browser market.
Once again, the regulators failed to foresee the future. The aggrieved parties in that case included Netscape, which was shut down in 2008. As of August 2020, Google's Chrome browser had a market share of 65.99%. Microsoft's Internet Explorer and its newer Edge browser had a combined share of about 1.88%.
How Does Pricing Work in a Monopolistic Market?
Pricing in a monopolistic market involves a balance between the firm's desire to maximize profits and the impact of consumer choices. While the dominant firm has some control over pricing, it must also consider the potential reactions of consumers to changes in price. Because there may still be some small degree of competition, the firm must be mindful as it does not have complete control.
How Can Governments Regulate Monopolistic Markets?
Governments can regulate monopolistic markets through antitrust laws, which aim to promote fair competition and prevent the abuse of monopoly power. These laws may include measures to break up monopolies, prevent anticompetitive mergers and acquisitions, and regulate pricing practices.
How Do Monopolistic Markets Impact Innovation?
In monopolistic markets, the pursuit of product differentiation drives innovation. Firms strive to create unique products or enhance existing ones to attract consumers. The competition for consumer attention fosters a culture of continuous improvement and creativity. In this lens, monopolies or monopolistic markets are seen as a positive influence on business.
How Do Monopolistic Markets Impact Income Inequality?
Monopolistic markets can contribute to income inequality as powerful firms amass wealth and resources, creating a concentration of economic power. Smaller competitors and new entrants may struggle to compete, limiting opportunities for entrepreneurship and upward mobility. Consider how small companies just simply can't compete with larger companies because of that form of income inequality.
The Bottom Line
A monopolistic market is characterized by a single dominant seller or producer with considerable influence over prices and market dynamics. Unlike perfect competition, monopolistic markets allow for some degree of product differentiation as the company does have 100% control over the market.
