A monopoly, as a theoretical economic construct, prevails when barriers to entry exist because one firm can operate at a lower marginal cost than its competitors. The barriers can be legal or regulatory, economic, or geographic. Absent competitors, the monopoly firm can raise prices, restrict output and hurt consumers. Typical monopoly markets operate with exclusive licensure, anti-competitive subsidization and/or tariff protection. These include public utilities and TV rights.
Until 20th century deregulation, the markets for oil and trucking, for example, operated with monopoly privilege. American economist Milton Friedman studied natural monopolies and only found two possible 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, he said, were questionable examples. De Beers' share of the diamond market later fell from 90% in 1980 to just 33% in 2013 through international competition.
Most monopolies can only hold lower marginal costs through government protection. In this way, marginal costs for monopolies can be reduced through subsidies or through costly restrictions imposed on possible competitors to raise their marginal costs. Competition can also be explicitly restricted through licenses and intellectual property.
Examples of Monopoly
No U.S. markets are more monopolistic than utilities. Providers of water, natural gas, telecommunications, and electricity are often granted exclusive rights to service municipalities through local governments. American professor of economics Harold Demsetz has pointed out, however, that these markets had no such monopoly tendencies before exclusive rights were granted; in fact, up to 45 different electric light companies operated in Chicago in 1907, for example.
Trucking and railroad companies became monopolistic after the establishment of the Interstate Commerce Commission (ICC), in 1887, which imposed heavy costs on start-up transportation competition. The regulatory agency's original purpose was to regulate railroads and trucking to ensure fair rates and to regulate other aspects of common carriers, including interstate bus lines and telephone companies.
In 1982, telecommunications firm AT&T was found to be in violation of U.S. antitrust law while acting as the sole supplier of telephone services to most of the country. As a result, it was forced to split into six subsidiaries, known as Baby Bells. In 1995, the ICC was abolished, with its various oversight responsibilities split among other federal agencies.
Myth in Steel and Oil
Carnegie Steel Company and Standard Oil are colloquially held as examples of 19th-century monopolies. However, later research by economists John McGee and Thomas DiLorenzo suggests that the founding entrepreneurs -- Andrew Carnegie and John D. Rockefeller -- "did not use predatory price cutting to acquire or keep monopoly power." In fact, prices for steel and oil fell, and output rose dramatically in both cases.