What is a 'Monopoly'
A monopoly is a market containing a single firm that has or is close to total control of the sector. Monopolies are typically forced to divest assets to satisfy anti-monopoly laws. These antitrust laws were put in place to protect consumers and control companies from evil practices thanks to total control.
BREAKING DOWN 'Monopoly'Monopolies are considered the extreme case of capitalism. Laws are regulated to maintain the free market system from being abused.
Illegal monopolies can use their dominance to their advantage. With a large market share, companies use pricing power to create an unfair market. Mergers and acquisitions are highly regulated and researched for this reason, as laws and government organizations ensure companies are practicing non-monopoly practices. Companies can still meet the demands of consumers without creating a monopoly.
In 1890, the Sherman Anti-Trust Act became the first legislation passed by the U.S. Congress to limit monopolies. The Sherman Anti-Trust Act had strong support by Congress, passing the Senate with a vote of 51 to 1 and passing the House of Representatives unanimously 242 to 0.
In 1914, two additional anti-trust laws were passed to help protect consumers and prevent monopolies. The Federal Trade Commission Act created the Federal Trade Commission (FTC), which limits unfair methods of competition for businesses. The Clayton Act created new rules for mergers and directors at multiple businesses.
Breaking Up Monopolies
The Sherman Anti-Trust Act has been used to break up large companies over the years. Examples of this law being used against big companies are the breaking up of Standard Oil Company and American Tobacco Company. The Sherman Anti-Trust Act was also used against Microsoft Corporation in an argument to split the company into two, which was later overturned on appeals.
The biggest monopoly breakup was AT&T. The large telecommunications company has been forced to sell off assets or split units several times to prevent a monopoly. After having control of the majority of U.S. phone calls, AT&T was challenged by United States v. AT&T. In 1982, AT&T had to divest 22 local exchange service companies.
Natural monopolies occur and are legal. Companies can have patents that limit their competition. Patents can help companies recoup their large research and development (R&D) costs, but they usually have a limited exclusive time period. Another example are public monopolies set up by governments to provide essential services. Some believe that utilities should offer public goods and services such as water and electricity at a price that is affordable to everyone.
A good example of a natural monopoly is the U.S. Postal Service. As a government-protected monopoly, the U.S. Postal Service is the only company that delivers regular mail to homes and businesses.