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What is a 'Monopoly'

A monopoly refers to a sector or industry dominated by one corporation, firm or entity. Monopolies can be considered an extreme result of free-market capitalism in that absent any restriction or restraints, a single company or group becomes large enough to own all or nearly all of the market (goods, supplies, commodities, infrastructure and assets) for a particular type of product or service. Antitrust laws and regulations are put in place to discourage monopolistic operations – protecting consumers, prohibiting practices that restrain trade and ensuring a marketplace remains open and competitive. "Monopoly" can also be used to mean the entity that has total or near-total control of a market.

BREAKING DOWN 'Monopoly'

A monopoly is a kind of structure that exists when one company or supplier produces and sells a product. If there is a monopoly in a single market with no other substitutes, it becomes a “pure monopoly.” When there are multiple sellers in an industry and there are many similar substitutes for the goods being produced, and companies keep some power in the market, then it is called monopolistic competition

Characteristics of a Monopoly

  • High or no barriers to entry: Other competitors are not able to enter the market
  • Single seller: There is only one seller in the market. In this instance, the company becomes the same as the industry it serves. 
  • Price maker: The company that operates the monopoly decides the price of the product that it will sell.
  • Price discrimination: The firm can change the price or quantity of the product at any time.  

Why Are Monopolies Illegal?

A monopoly is characterized by the absence of competition, which can lead to high costs for consumers, inferior products and services, and corrupt behavior. A company that dominates a business sector or industry can use that dominance to its advantage, and at the expense of others. It can create artificial scarcities, fix prices and otherwise circumvent natural laws of supply and demand. It can impede new entrants into the field, discriminate and inhibit experimentation or new product development, while the public — robbed of the recourse of using a competitor — is at its mercy. A monopolized market often becomes an unequal, and even inefficient, one.

Mergers and acquisitions among companies in the same business are highly regulated and researched for this reason. Firms are typically forced to divest assets if federal authorities think a proposed merger or takeover will violate anti-monopoly laws.

Natural Monopolies

Not all monopolies are illegal. There are such things as natural monopolies, which occur for several reasons. Sometimes, a specialized industry may have certain barriers to entry that only one company or individual can meet. Or, a company may have patents on its products that limit its competition in a specific field; the monopoly is considered just compensation for the high start-up and research and development (R&D) costs the company has incurred.

There are also public monopolies set up by governments to provide essential services and goods, such as the U.S. Postal Service (though of course, the USPS has less of a monopoly on mail delivery since the advent of private carriers like United Parcel Service and FedEx). 

The utilities industry is an excellent example of a sector where natural monopolies flourish. Usually, there is only one major (private) company supplying energy or water in a region or municipality. This is allowed because these suppliers incur large costs in producing power or water and providing these essentials to each local household and business, and it is considered more efficient for there to be a sole provider of these services. (Imagine what your neighborhood would look like if there were more than one electric company serving your area. The streets would be overrun with utility poles and electrical wires as the different companies competed to sign up customers, and then hook up their power lines to houses.) But the tradeoff is that the government heavily regulates and monitors the utility company, controlling the rates it can charge its customers and the timing of any rate increases.

Antitrust Laws

In 1890, the Sherman Antitrust Act became the first legislation passed by the U.S. Congress to limit monopolies. The Sherman Antitrust 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 antitrust pieces of legislation were passed to help protect consumers and prevent monopolies. The Clayton Antitrust Act created new rules for mergers and corporate directors, and also listed specific examples of practices that would violate the Sherman Act. The Federal Trade Commission Act created the Federal Trade Commission (FTC), which sets standards for business practices and enforces the two antitrust acts, along with the Antitrust Division of the United States Department of Justice.

The laws are intended to preserve competition and allow smaller companies to enter a market, and not to merely suppress strong companies.

Breaking Up Monopolies

The Sherman Antitrust Act has been used to break up large companies over the years, including Standard Oil Company and American Tobacco Company.

In 1994, the U.S. government accused Microsoft of using its significant market share in the PC operating systems business to prevent competition and maintain a monopoly. The complaint, filed on July 15, 1994, stated that "The United States of America, acting under the direction of the Attorney General of the United States, brings this civil action to prevent and restrain the defendant Microsoft Corporation from using exclusionary and anticompetitive contracts to market its personal computer operating system software. By these contracts, Microsoft has unlawfully maintained its monopoly of personal computer operating systems and has an unreasonably restrained trade." A federal district judge ruled in 1998 that Microsoft was to be broken into two technology companies, but the decision was later reversed on appeal by a higher court. The controversial outcome was that, despite a few changes, Microsoft was free to maintain its operating system, application development and marketing methods.

The most prominent monopoly breakup in U.S. history was that of AT&T. After being allowed to control the nation's telephone service for decades, as a government-supported monopoly, the giant telecommunications company found itself challenged under antitrust laws. In 1982, after an eight-year court battle, AT&T had to divest itself of 22 local exchange service companies, and it has been forced to sell off assets or split units several times since.

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