A monopoly exists when only one company can supply an essential product or service in a given region because of significant barriers to entry for any competitor. The barriers can be legal or regulatory, economic, or geographic.

In the absence of competitors, a monopoly company can raise its prices, restrict its production, or safely ignore customer service concerns.

Nevertheless, they are seen as necessary for the provision of certain critical services. In the U.S., these include public utilities and television broadcast rights. Monopoly privileges generally come with increased regulatory scrutiny.

Licensed Monopolies

Monopolies are permitted to exist and even exclusively licensed to provide services or products when it is seen as being in the best interest of consumers.

Key Takeaways

  • Historic monopolies included John D. Rockefeller's Standard Oil and J.B. Duke's American Tobacco Co.
  • The biggest monopoly breakup of modern times was AT&T, once the sole provider of telephone service in the U.S.
  • Most utilities today operate as government-licensed monopolies.

Utilities, for example, maintain extensive infrastructures in order to provide essential services that must be reliably available to all consumers within their business areas. A competitor would not be permitted to tap into the water company's dam or the electricity company's grid. Nor could the competitor realistically replicate the existing infrastructure to provide its own service.

Thus, the utilities are effectively licensed to operate a monopoly. Their business operations and pricing policies may be subject to review and regulation by local and state governments.

The U.S. markets that operate as monopolies or near-monopolies in the U.S. include providers of water, natural gas, telecommunications, and electricity.

Notably, these monopolies were actually created by government action. Economist Harold Demsetz has pointed out these markets had no monopolistic tendencies before governments began granting exclusive rights to them. About 45 electricity companies were in operation in Chicago in 1907.

Outlawed Monopolies

Monopolies can be broken up by government action. At one time, the oil industry was monopolized by John D. Rockefeller's Standard Oil and the tobacco industry was operated by J.B. Duke's American Tobacco Co. Both companies fell victim to the 1890 Sherman Antitrust Act, which outlawed monopolistic practices.

U.S. antitrust laws are used to prevent a company from using unfair business practices to maintain or expand a monopoly position.

The most notorious breakup of a monopoly in modern American history occurred In 1982 with the breakup of the telecommunications company AT&T. Ma Bell, as it was then known, was the sole provider of landline telephone service to most of the U.S. It was forced to split into six regional subsidiaries, known as Baby Bells. In retrospect, the irrelevance of a monopoly on landline phone service could not have been anticipated.

Broadly, U.S. law does not punish a company for being the sole provider of a product or service, but it will punish a company for using unfair practices to maintain or expand its monopoly position.

That's how Microsoft got into trouble. The company was accused of violating antitrust regulations by trying to use its near-monopoly status as the creator of the Windows operating system to facilitate a similar domination of the internet browser market. The case was settled in 2001 with some concessions by the company.

Once again, the regulators failed to foresee the future. The aggrieved parties in that case included Netscape, which was shut down in 2008. As of 2019, Google's Chrome browser had a market share of 63.69%. Microsoft's Internet Explorer and its newer Edge browser had a combined share of about 13.5%.

Temporary Monopolies

American economist Milton Friedman studied natural monopolies and found only two examples that might have persisted without special government privilege: the New York Stock Exchange from the 1870s until 1934, and the De Beers diamond mining company.

Even those, Friedman said, were questionable examples. De Beers' share of the diamond market fell from 90% in 1980 to 33% in 2013 when other producers managed to get into the market. And the venerable New York Stock Exchange has plenty of competition now. It is one of 13 stock exchanges operating in the U.S.