The word ‘monopoly’ might remind you of the board game where players attempt to outsmart
each other buying and trading properties. The game offers both rewards and consequences.
But the board game is only a distant shadow of what monopoly is.
In real-life, a monopoly is a market controlled by a single seller that
offers a product or service which has no close substitute. The goals of every monopoly are;
to keep competition out of the market, dominate the market, and call the shots.
So now, let’s look at three factors that constitute a monopoly.
1. A single firm sales a particular product or service
In an open market, it will be difficult for one company to sell everything and not expect a
challenge from other companies. As long as there’s a great demand and there’s profit on a product,
other firms will storm the market with similar products, ultimately leading to a price war.
When there is a price war on any item, who do you think benefits? Certainly, you and I;
in other words, the consuming public. But when 25%
or more of a particular market is controlled by one company, a monopoly happens.
The name of the game is 'control'. Monopolies want to determine the price,
control distribution and silence any rivalry. Even if you are sold an inferior product,
you can't complain because, they are in charge, and they call the shots.
2. There are no close substitutes. When the public is presented with
a product or service, and they can’t find another item that can give similar value,
then monopoly is at work. Talking about a close substitute, it must not look like or
feel the same as the actual product, but it should be able to serve as a replacement.
Let’s pretend we're going on a picnic or camping in a distant community with no
electricity. We will need a generator for power.
If the price of a generator is too high, we may find a solar power device as a close substitute.
In a situation where you can’t find an alternative to a generator, and it's produced and distributed
by a particular firm, then you’re essentially srewed. The generator manufacturer can set the
price of a generator as high as he likes and there’s nothing you can do about that.
If I needed a bottle of Coke and I couldn’t find it, if I can get Pepsi,
then I have a close substitute. For the Coca-Cola Company to be in business, it must sell at a
price that is friendly to everyone. Do you see why monopolies dont like this?
3. There are barriers to entry If in a market where the entry-level is too high,
such as, maybe a lot of money is required to get in, then monopoly happens.
This is because big companies with a lot of money will occupy every space.
They have the money to pay any amount of levies.
Tough government policies can lead to a situation like this.
Newcomers will not be able to meet government requirements. When this becomes the situation,
the big guys will have a field day. And the newcomers will be kept out of the market.
On the hand, these two factors prevent a monopoly from happening
1. Choices In a market where there’s a level playing
ground for everyone, a monopoly will not work. For instance, when we don’t want to go to a particular
fast food restaurant, we may choose another one. There are a bunch of other sellers to choose from.
If you need to buy from a mom and pop store, you’d find so many around your location.
That is why you hardly find a monopoly in this kind of business.
2. Competition When there are
several companies producing products that do the same thing, then the market is open
for competition. Those that benefit most in this kind of situation are the consumers.
Here, you will find each producer making a genuine effort to provide value to the customers.
Much of this can be seen in the car manufacturing sector.
Different car companies come up with new designs of cars almost yearly.
They provide value and deliver quality service. Each firm attempts to give the
buyers the best products at the most affordable prices.
The only thing that keeps the players in the car industry going is their creativity
and marketing skills. The competition is healthy, and no winner takes it all.
But, monopolies don’t like people having choices
and they are determine to shoot down the competition on sight.
Now, the big question is: Does the government aid monopoly or not? If they do, how does it happen?
Ordinarily, most people would prefer a free market where a level playing ground is provided
for everyone. But, there are several ways that government decisions appear to favour a monopoly.
Some of these decisions may be necessary for running society in an orderly manner.
But, the average consumer is within their rights to
feel concerned about how official decisions affect their lives too.
There have been instances where people suggest that elected officials abuse
their decision-making powers just to favor friends and political allies. So,
we shall look at the different ways government activities make a monopoly succeed.
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Different ways government appear to support monopoly
1. Policies and regulations It is the duty of the government to create laws,
regulations, and policies that determine how companies carry out their businesses.
But some of these regulations have favoured some companies more than it has done for others.
Let’s take a quick look at some of them.
Exclusive rights – A company can get a patent over a particular product it has created.
This legal protection gives the producer an exclusive right to
produce and distribute the product for a long period.
This legal protection works much the same way as an intellectual property right.
Intellectual property rights gives an individual the exclusive right
to something they created such as inventions, songs, and books.
These creations of the mind are protected by law. Any person that makes use of another
person’s creativity without the permission of the owner would have violated the law on Copyright.
It then means that, as long as a company has exclusive rights over a product or invention,
they have control over the pricing and distribution. This is one government law
that has given so much power to companies to build a monopoly around products they have developed.
The reason often given for this legal backing is to encourage
creativity. But, it is also meant to protect the financial investment made
by the producer during the research and development of a product.
However, the truth is that a situation like this gives the producer so much
power and control. By the time the exclusive right has expired,
that product will have little value or may have become outdated.
This is a monopoly. It destroys competition and puts the public at the mercy of the manufacturers.
Some big corporations that hold this type of right have been accused of manipulating
systems to their advantage. They use their friendship with those in authority to make
the system work for themselves while rival companies are kept at arm’s length or destroyed.
Tax cuts – Government could grant tax cuts to the manufacturer of certain products
that may be classified as essential items or services. Often, good reasons are given for
cases like this. But, reports have suggested that these privileges have been abused.
This will surely give the selected company a competitive advantage over other firms in the
same market. When substitute products cannot be manufactured at the same price or less,
it will eliminate competition.
High entry cost – Sometimes, government regulations can raise the bar of entry
into a particular market. When this happens, the chances of new firms going into the business drop.
Sometimes, regulatory bodies create these policies
to cut down the influence of older and powerful corporations.
What happens is that diehard businessmen understand only one language – ‘profit’.
The result is often to the advantage of the big players - the monopolists.
Corporate history is filled with instances of situations where rival
companies dropped off from competition and were bought over by the big players.
Decisions like this have led to giant corporations growing even bigger.
They build more wealth and become major influencers over the entire system.
When rival companies and smaller businesses get crushed, the public gets served lower quality
products at higher costs. And there will be little or no room to challenge the system.
2. Government granted monopoly A government may grant a monopoly status to a
single corporation or a limited number to deliver essential services to the public. In this case,
there will be no room for new entries once the limited number of licenses has been issued.
The best examples of this are public utilities such as water, sewage, natural gas,
and electricity. These corporations may be privately owned or publicly owned.
The limiting of licensing to one or a few companies may be necessary,
but they are still operating as a monopoly. For instance, it would
appear chaotic to issue licenses to several companies in the same city for electricity.
They will all come in with their power plants and run cables.
A situation like this will cost the companies more, and billing will go high.
There is also a problem of multiple placements of facilities which will pose a danger to the public.
What the government does, in this case,
is to make regulations that will keep the billing system and service delivery in check.
For example, the postal service was given a monopoly status in 1654. When the market was
opened up in 2006, it ushered in competition, and new companies came in with innovations.
Until the 1970s AT&T had a monopoly in the telephone industry.
The break up in 1974 had it dissolve into seven regional companies.
Other companies jumped in, and with that came innovations and new ways of operations.
Why do people always complain about monopolies?
In as much as a monopoly has some beneficial sides to it, people have their suspicions. The
consuming public kicks against market dominance by a single company for three major reasons.
1. Pricing People always want to get the best bargain for
anything they want to buy. A monopoly shuts down the competition and, therefore, singlehandedly
controls the price of the products. And you may not like it, but you don’t really have a choice.
Monopolies may operate under legal protection, but it's extortion when the value you provide
is far less than the huge amount you charge for it. The consumers may be
helpless but there is still a moral question to answer.
2. Service delivery In an open market with
healthy competition, the customer is the king.
When there are several options, the companies work hard, providing good service delivery.
A lot of this can be seen in their customer relations efforts. Complaints will be promptly
looked into. Promos, special offers, and discount offers will become regular consumer experiences.
A monopoly hardly cares about all these things unless the intention
is to suppress opposition and keep rival businesses out of the market.
3. Product Quality People want to get
value for every dollar they spend, but this is not possible with a monopoly. When the power of
control is in the hands of one organization or a few, quality will become an issue.
Diehard monopolists are greedy by nature and are driven by profits and numbers. In
the absence of competition, the consumers are left with limited
choices. The sole producers can flood the market with products of much less quality.
The government must set up quality control structures to check and
regulate the excesses of these guys. But how far can the government go?
When the big players have so much money to throw around,
they can buy anyone and influence any system to their advantage. Officials can be made to
compromise, while political friends will do a good job of fronting smart debates in their favor.
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