Most of us, when we hear the word “monopoly,” we think of the classic board game, where
you go around the board and buy up as much real estate as possible.
This game is actually a great introduction to real monopolies.
But let’s now examine in more detail how they form, their potentially devastating effects,
and how governments attempt to stop them, though they also sometimes create them.
First, to review, a monopoly is when a single seller dominates a market.
This seller is also known as a monopolist.
While there are many ways monopolies can arise, they primarily do so when there are barriers
which prevent companies from entering a market that has a single supplier.
For example, let’s say there is just one pharmaceutical company that exclusively produces
a drug which can cure a deadly disease.
Another characteristic of a monopoly is that the product being sold is unique.
A drug that can prevent death from a deadly disease is certainly unique, but if the company
just sold a general anti-inflammatory drug instead, that is not, and other companies
could presumably produce an alternative to compete in that market.
The main problem with monopolies is that they can take advantage of their market power by
charging high prices.
In the case of the life saving drug, the price would likely be high due to the demand.
But if the one company that produced the drug could charge an unreasonably high price for
it, they likely would, as their goal is to maximize profits.
Not only that, but the monopolist may even be able to divide consumers into two or more
groups and charge a different price to each group.
This is known as price discrimination.
Monopolies can also cause a decline in the quality of goods and services as there is
no competition to put pressure on a company to increase or even maintain quality.
It’s not just consumers, either.
Monopolies can discourage entrepreneurship by preventing other companies from entering
a market.
And finally, monopolists may also be in a position to create a monopsony, which is when
a single buyer dominates a market.
In other words, a monopolist may be so powerful due to dominating one market as a seller,
that it can dominate other markets as a buyer.
So how do monopolies form?
Often it’s because one company becomes very powerful.
It does this by buying up intellectual property rights, buying up competition, hoarding a
scarce resource, or even a government giving it an exclusive right to sell something.
In the case of our fictional pharmaceutical company, perhaps it bought up the competition
and then lobbied for a law to be passed that would effectively make it impossible for competitors
to produce the very same drug.
Now, sometimes governments willingly create monopolies.
This is only because it is attempting to help consumers afford goods or services that have
very expensive start-up costs.
For example, if a pharmaceutical company has to spend billions of dollars to research and
develop the life-saving drug, a government may give money to the company to make the
drug cheaper for consumers.
Often, it is a temporary measure until economies of scale kick in.
Economies of scale are cost advantages that companies get the more they produce something.
It’s expensive at first, but once the company produces something at a large volume, it becomes
more efficient for them to produce it, and therefore costs go down.
As we mentioned earlier, governments can also create monopolies by granting intellectual
property rights.
By granting patents, or licenses that provide the right to make, use, or sell an invention,
governments hope that companies will be able to make enough profit to expand their research
and development.
The goal is innovation.
But you are likely more familiar with governments fighting monopolies.
Perhaps you have visions of Teddy Roosevelt “trust busting” giant corporations during
the Progressive Era of the early 1900s, as we learned in the American History series.
A trust is an old term that describes a large company which tries to get monopolistic control
of a market.
Indeed, today breaking up a monopoly remains a way governments may attempt to make markets
more competitive.
If the government decides a company has become too powerful in a market, it may decide to
force them to splinter into smaller, separate companies.
Related to this, governments often have merger policies which regulate how, or even if, companies
can merge together.
When two giant telecommunications companies, T-Mobile and Sprint, wanted to merge in 2018,
they first had to get the approval of the United States government.
So as we can see, governments often let some monopolies exist, even creating some themselves.
This doesn’t mean that they don’t regulate them.
The government may investigate abuse of monopoly power to make sure trade is fair.
It may create price controls to make sure corporations don’t take advantage of consumers.
And finally, it may regulate the quality of goods and services provided by a monopoly.
In conclusion, monopolies are almost inevitable in free markets.
One company will often rise to dominate an entire sector or industry.
Indeed, monopolies can be considered a result of a market economy entirely absent of any
restrictions.
This is why countries around the world have made efforts to prevent them over the past
150 years.
However, it’s also important to remember that sometimes governments create monopolies
for the public good.
Even if governments allow monopolies, they ideally are always regulating them, because
without that regulation, we as consumers might face extremely high prices, combined with
poor quality of goods and services.