What is a 'Franchised Monopoly'

A franchised monopoly is status given by the government to a company or individual. A monopoly refers to a situation where a given sector or industry is dominated by one firm, entity or corporation which has become large enough to own all or nearly all of the market for a particular type of product or service. A franchised monopoly is sheltered from competition by virtue of an exclusive license or patent granted to it by the government.

BREAKING DOWN 'Franchised Monopoly'

Generally speaking, monopolies are discouraged. Empirically speaking, monopolized industries have led to non-competitive, closed marketplaces that are not in the best interest of consumers, as they are forced to transact with only one supplier, which can lead to high prices and low quality. In the United States, antitrust laws and regulations are put in place to discourage monopolistic operations. However, franchised monopolies are perfectly legal, since the government grants a company the right to be the sole producer or provider of a good or service.

Franchised Monopolies in Practice

Government-issued franchised monopolies are typically established because they are believed to be the best option for supplying a good or service from the perspective of both the producers and the consumers of that good or service. Given government intervention and sometimes outright subsidies, franchised monopolies allow producers to operate in markets where they must sink considerable sums of capital to produce a good or service. Likewise, since governments that grant monopolies often regulate the price that can be charged by the supplier of the good or service, consumers gain access to a good or service that in a free market may be unaffordable.

In most nations, franchised monopolies can be found in essential sectors such as transportation, water supply and power. In the United States, for example, utility companies and the U.S. Postal Service are examples of franchised monopolies. Another example would be the telecommunications firm AT&T (T), which until 1984, was a franchised monopoly sanctioned by the government to provide affordable and reliable phone service to U.S. consumers. In many countries, primarily developing nations, natural resources such as oil, gas, metals and minerals are also controlled by government-sanctioned monopolies. While one argument in favor of franchised monopolies is that they ensure that control over essential industries remains in the hands of the public and they help control the cost of capital-intensive output, opponents of such monopolies claim that they promote favoritism and introduce market distortions.

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