What Is a Monopoly?

What is a monopoly?

A monopoly is a market structure where a single seller or producer assumes a dominant position in an industry or sector. Monopolies are discouraged in market economies because they stifle competition and limit substitutes for consumers.

In the United States, antitrust laws are in place to restrict monopolies, ensuring that a company cannot control a market and use that control to exploit its customers.

Key points to remember

  • A monopoly is a market structure consisting of a single seller or producer.
  • A monopoly limits the available substitutes for its product and creates barriers for competitors to enter the market.
  • Monopolies can lead to unfair consumer practices.
  • Some monopolies such as those in the utility sector are regulated by the government.

Understanding a Monopoly

A monopoly is a business that is characterized by a lack of competition in a market and unavailable substitutes for its product. Monopolies can dictate price changes and create barriers for competitors to enter the market.

Firms become monopolies by controlling the entire supply chain from production to sales through vertical integration, or by buying up competing firms in the market through horizontal integration, thus becoming the sole producer.

Monopolies typically reap the benefits of economies of scale, the ability to produce massive quantities at lower cost per unit.

Types of monopolies

pure monopoly

A pure monopoly is a single seller in a market or industry with high barriers to entry such as high start-up costs whose product has no substitutes.

Microsoft Corporation was the first company to hold a pure monopoly position in operating systems for personal computers. In 2022, its desktop Windows software still held a 75% market share.

Monopolistic competition

Multiple sellers in an industry sector with similar substitutes are defined as having monopolistic competition. Barriers to entry are low, and competing companies differentiate themselves through their pricing and marketing efforts.

Their offers are not perfect substitutes, like Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons.

The natural monopoly

A natural monopoly develops by relying on unique raw materials, technology or specialization. Companies that have patents or significant research and development costs, such as pharmaceutical companies, are considered natural monopolies.

Public monopolies

Public monopolies provide essential services and goods, such as the utility industry, as a single company usually supplies energy or water to an area. Monopoly is licensed and heavily regulated by government municipalities and tariffs and tariff increases are controlled.

Advantages and disadvantages of a monopoly

Without competition, monopolies can set prices and maintain consistent and reliable prices for consumers. Monopolies benefit from economies of scale, often able to produce massive quantities at lower cost per unit. Being alone as a monopoly allows a company to safely invest in innovation without fear of competition.

Conversely, a company that dominates a sector or industry can use its advantage to create artificial shortages, fix prices and supply poor quality products. Consumers must be confident that a monopoly operates ethically due to limited or unavailable substitutes in the market.

Regulation of a monopoly

Antitrust laws and regulations are in place to discourage monopoly operations, protect consumers and ensure an open market.

In 1890, the Sherman Antitrust Act was passed by the US Congress to limit “trusts”, a precursor to monopoly, or groups of companies that agreed to fix prices. This act dismantled monopolies, including the Standard Oil Company and the American Tobacco Company.

The Clayton Antitrust Act of 1914 created rules for mergers, corporate directors, and listed practices that would violate the Sherman Antitrust Act, and the Federal Trade Commission Act created the Federal Trade Commission (FTC), which, along with the Division United States Department of Justice Antitrust, sets standards for business practices and enforces both antitrust laws.

The most significant monopoly break in US history was that of AT&T. After controlling the country’s telephone service for decades as a government-backed monopoly, AT&T fell foul of antitrust laws. In 1982, AT&T, which had telephone lines reaching almost every home and business in the United States, was forced to divest itself of 22 local exchange companies, the main obstacle to competition.

Which companies have faced antitrust violations as a monopoly?

In 1994, Microsoft was accused of using its large market share in the personal computer operating system industry to prevent competition and maintain a monopoly. Using antitrust law, Microsoft was accused of “using exclusionary and anti-competitive contracts to market its personal computer operating system software. Through these contracts, Microsoft unlawfully maintained its monopoly over operating systems for personal computer and has an unreasonably restricted trade.”

A federal district judge ruled in 1998 that Microsoft should be split into two technology companies, but the decision was later overturned on appeal by a higher court. Microsoft was free to maintain its operating system, application development, and marketing methods.

What is pricing?

Price fixing is an agreement between competitors to raise, lower, maintain or stabilize prices or price levels. Antitrust laws require that each company establish its own prices and other competitive conditions, without agreeing with a competitor. Consumers choose which products and services to buy and expect the price to be determined by supply and demand, not an agreement between competitors.

How do antitrust laws protect consumers?

Antitrust cases can be prosecuted by state or federal governments. Consumers who suspect that a company violates antitrust laws can contact the Antitrust Division or the Federal Trade Commission at the federal level. A local business operating in a state may be investigated by the state attorney general.

The essential

A monopoly is defined as a single seller or producer that excludes competition from supplying the same product. A monopoly can dictate price changes and create barriers to competitors entering the market. Antitrust laws are in place to restrict monopolies, ensuring that a company cannot control a market and use that control to exploit its customers.