Published on Feb 15, 2016
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. (This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry).
Monopolies are thus characterized by a lack of economic competition to produce the good (or service) and a lack of viable substitute goods. In economics, a monopoly is a single seller. In law, a monopoly is business entity that has significant market power, that is, the power, to charge high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).
A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in a game theoretic manner – meaning that expectations about their behavior affects other players' choice of strategy and vice versa.
When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition. Sometimes governments decide legally that a given company is a monopoly that doesn't serve the best interests of the market and/or consumers. Governments may force such companies to divide into smaller independent corporations as was the case of United States v. AT&T, or alter its behavior as was the case of United States v. Microsoft, to protect consumers.
Monopolies can be established by a government, form naturally, or form by mergers. A monopoly is said to be coercive when the monopoly actively prohibits competitors by using practices (such as underselling) which derive from its market or political influence. There is often debate of whether market restrictions are in the best long-term interest of present and future consumers.
Advantages and Disadvantages of Monopoly Market
• Stability of prices- in a monopoly market the prices are most of the times stable. This happens because there is only one firm involved in the market that sets the prices if and when it feels like. In other types of market structures prices are not stable and tend to be elastic as a result of the competition that exists but this isn't the case in a monopoly market as there is little or no competition at all.
• Source of revenue for the government- the government gets revenue in form of taxation from monopoly firms.
• Massive profits- due to the absence of competitors which leads to high number of sales monopoly firms tend to receive super profits from their operations. The massive profits realized may be used in such things as launching other products, carrying out research and development among many other things that may be beneficial to the firm.
• Monopoly firms offer some services effectively and efficiently .
• Exploitation of consumers- a monopoly market is best known for consumer exploitation. There are indeed no competing products and as a result the consumer gets a raw deal in terms of quantity, quality and pricing. The firm may find it easy to produce inferior or substandard goods if it wishes because t the end of the day they know very well that the items will be purchased as there are no competing products for the already available market.
• Dissatisfied consumers- consumers get a raw deal from a monopoly market because quality will be compromised. Therefore it is not a wonder to see very dissatisfied consumers who often complain about the firm's products
• Higher prices- no competition in the market means absence of such things as price wars that may have benefited the consumer and as a result of this monopoly firms tend to charge higher prices on goods and services hence inconveniencing the buyer.
• Price discrimination- monopoly firms are also sometimes known for practicing price discrimination where they charge different prices on the same product for different consumers.
• Inferior goods and services- competition is minimal or totally absent and as such the monopoly firm may willingly produce inferior goods and services because after all they know the goods will not fail to sell .
In the United States, toward the last part of the nineteenth century, widespread business combinations known as trust agreements existed. These agreements usually involved two or more companies that combined with the purpose of raising prices and lowering output, giving the trustees the power to control competition and maximize profits at the public's expense. These trust agreements would result in a monopoly. To combat this sort of business behavior, Congress passed antitrust legislation.
In 1890 Congress passed the Sherman Antitrust Act, which forbade all combinations or conspiracies in restraint of trade. The act contained two substantive provisions. Section 1 declared illegal contracts and conspiracies in restraint of trade, and Section 2 prohibited monopolization and attempts to monopolize. When an injured party or the government filed suits, the courts could order the guilty firms to stop their illegal behavior or the firms could be dissolved. The Sherman Antitrust Act pertained only to trade within the states, and monopolies still flourished as companies found ways around the law.
In 1914 Congress passed the Clayton Act as an amendment to the Sherman Act. The Clayton Act made certain practices illegal when their effect A cartoon illustrating antitrust legislation attacking monopolieswas to lessen competition or to create a monopoly.
The main provisions of this act included
1) forbidding discrimination in price, services, or facilities between customers;
2) determining that antitrust laws were not applicable to labor organizations;
3) prohibiting requirements that customers buy additional items in order to obtain products desired; and
4) making it illegal for one corporation to acquire the stock of another with intention of creating a monopoly. Because loopholes were also present in the Clayton Act, the Federal Trade Commission (FTC) was established to enforce the antitrust legislation.
Passed in 1914, the Federal Trade Commission Act provided that "unfair methods of competition in or affecting commerce are hereby declared unlawful."
Globalization and the maturity of the world economy have prompted calls for the retirement of antitrust laws. In the early 1900s, people suggesting that the government didn't need to have a hammer to smash big business with would've been eyed suspiciously as a member of a lunatic fringe or one of Wall Street's big money cartel members. Over the years, these calls have been coming from people like economist Milton Friedman, former Federal Reserve Chairman, Alan Greenspan and everyday consumers. If the history of government and business is any indication, the government is more likely to increase the range and power of antitrust laws rather than relinquish such a useful weapon.
The Journal of Commerce Article