What is a monopoly and what are its characteristics?


A monopoly refers to the fact that one company and its product offerings dominate a sector or industry. Monopolies can be considered as an extreme consequence of the free market economy, in the absence of restrictions or regulations, where a company or economic group becomes large enough to monopolize all (or almost all) of the market – goods, supplies – raw materials, infrastructure, and technology- of a particular type of product or service. The term monopoly is often used to describe an entity that has full (or nearly full) control of a market.

Understanding Monopolies

Monopolies technically enjoy an unfair advantage over their competition, since they are (either the sole provider of the good or service or they are the provider that controls most of the market for that product). Although monopolies may differ from industry to industry, they tend to share similar characteristics that include:

High barriers to entry

Competitors are not able to enter the market and the monopoly can easily prevent the existence of competition by developing a strong foothold in the industry by buying out potential competitors. (An example of this would be the purchase of Instagram and Whatsapp by Facebook).

The only seller

There is only one vendor in the market, meaning the company becomes the very industry it serves.

Define the market price

The company that operates a monopoly decides the price of the product that it will sell, without the existence of competition that can counterbalance it and lower prices. As a result, monopolies can raise prices at will.

Scale economics

A monopoly can often produce at a lower cost than smaller companies. Monopolies can buy large amounts of inventory, for example at a discounted volume. As a result, a monopoly can lower its prices so much that smaller competitors cannot survive. Essentially, monopolies can engage in price wars because of the scale of their manufacturing operations, distribution networks, as well as warehouse and shipping networks, so they can drive the prices of their products much lower than any other competitor. of the industry.

The pure monopolies

A company with a pure monopoly means that the company is the only seller in the market and has no other substitutes. For many years, Microsoft Corporation had a monopoly on the software and operating systems that were used on computers. Also, with pure monopolies, there are high barriers to entry, such as significant costs to undertake the same type of business that the monopoly firm owns, making it very difficult for competitors to enter the market.

Monopolistic competition

When there are multiple sellers in an industry, with many similar substitutes for the goods being produced, and the companies retain some market power, this is called monopolistic competition. In this case, the industry has so many services that offer similar products or services, but their offerings are not perfect substitutes.

In monopolistic competition, entry and exit barriers are typically low, and companies try to differentiate themselves through lower prices and marketing strategies. However, since the products are very similar among different competitors, it is difficult for consumers to know which product is the best. Some examples of monopolistic competition include retail stores, restaurants, and beauty salons.

Natural monopolies

A natural monopoly develops when a company becomes a monopoly due to the high costs of entrepreneurship in the industry. Also, natural monopolies can arise in industries that require unique raw materials, technology, or a specialized industry, where only one company can meet the needs.

Companies that have patents on their products, which prevent competitors from developing the same product in a specific field, have a natural monopoly. Patents allow the company to earn money for multiple years without the fear of competition that can quickly recoup the investment made in terms of capital, infrastructure, research and development. Pharmaceutical companies hold patents on their inventions for several years so that other companies are forced to invest in innovation and research.

There are also monopolies in companies that provide public services such as water and electricity. In this case, governments grant some companies the right to monopoly because, in general terms, it is much more practical and efficient for a single company to control the provision of service in a single area, due to the large investments in infrastructure that are made. . It is hard to imagine what service delivery would be like if multiple companies could co-locate their infrastructure so that consumers had the freedom to choose their utility provider.

Why monopolies are illegal

A monopoly is characterized by the absence of competition, which leads to high costs for consumers, provision of services and goods of lower quality, and corrupt behavior within companies. A company that dominates a single sector can use this advantage for its own benefit and to the detriment of the general interest. This can lead the company to set prices at its discretion, bypassing the laws of supply and demand, preventing new competitors from entering the market and discouraging innovation and competition for the development of better products and services. A monopolized market frequently leads to a situation of injustice, inequality and inefficiency.

Corporate mergers and acquisitions of companies in the same sector are widely monitored by governments because they can lead to the consolidation of monopolies that affect consumers and social welfare. This is why antitrust laws exist to try to limit the market power of these large companies.

Antitrust laws

Antitrust laws and other regulations are intended to prevent monopoly operations in the market, protect consumers, prohibit such practices in commerce and ensure that the market remains open and competitive.

In 1890, the Sherman Act was introduced in the United States in order to protect consumers from monopolistic practices. The law was approved in the Senate by 51 votes to one and in the House of Representatives, it won unanimous support with 242 votes to zero.

In 1914, two additional laws were introduced in the United States to protect consumers. The Clayton Act created new regulations for business mergers and created the Federal Trade Commission, which establishes standards and practices so that laws are enforced and violators can be brought to justice.

Breaking the monopolies

As a consequence of these laws, the division of oil giant Standard Oil Company was carried out, which ended up divided into several companies that competed with each other, as well as the Tobacco Company was divided.

You may also be interested in: What is an oligopoly and how does it affect economies?

In the history of the United States, there have been rulings against companies such as Microsoft, AT & T, since, being companies with broad market power, they limited the options of consumers and generated very high rents on their products.

Today US anti-trust laws target companies like Amazon, Facebook and Google, as they have amassed great market power over the past decade.

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