Dictionary:

monopoly

  (mə-nŏp'ə-lē)

1. Exclusive control by one group of the means of producing or selling a commodity or service: “Monopoly frequently … arises from government support or from collusive agreements among individuals” (Milton Friedman).
2. Law. A right granted by a government giving exclusive control over a specified commercial activity to a single party.
3. 1. A company or group having exclusive control over a commercial activity.
   2. A commodity or service so controlled.
4. 1. Exclusive possession or control: arrogantly claims to have a monopoly on the truth.
   2. Something that is exclusively possessed or controlled: showed that scientific achievement is not a male monopoly.

[Latin monopōlium, from Greek monopōlion : mono-, mono- + pōlein, to sell.]

A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition - which often results in high prices and inferior products.

For a strict academic definition, a monopoly is a market containing a single firm.

Investopedia Says:
Monopoly is the extreme case in capitalism. Most believe that, with few exceptions, the system just doesn't work when there is only one provider of a good or service because there is no incentive to improve it to meet the demands of consumers. Governments attempt to prevent monopolies from arising through the use of antitrust laws.

Of course, there are gray areas; take for example the granting of patents on new inventions. These give, in effect, a monopoly on a product for a set period of time. The reasoning behind patents is to give innovators some time to recoup what are often large research and development costs. In theory, they are a way of using monopolies to promote innovation. 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 affordable to everyone.

Related Links:
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! Economics Basics
Check out the history and reasons behind antitrust laws, as well as the arguments over them. Antitrust Defined

Control of the production and distribution of a product or service by one firm or a group of firms acting in concert. In its pure form, monopoly, which is characterized by an absence of competition, leads to high prices and a general lack of responsiveness to the needs and desires of consumers. Although the most flagrant monopolistic practices in the United States were outlawed by Antitrust Laws enacted in the late 19th century and early 20th century, monopolies persist in some degree as the result of such factors as patents, scarce essential materials, and high startup and production costs that discourage competition in certain industries. Public monopolies-those operated by the government, such as the post office, or closely regulated by the government, such as utilities-ensure the delivery of essential products and services at acceptable prices and generally avoid the disadvantages produced by private monopolies. Monopsony the dominance of a market by one buyer or group of buyers acting together, is less prevalent than monopoly. See also Cartel; Oligopoly; Perfect Competition.

Situation in which one and only one company produces and/or sells a particular product or service. Monopolies occur in the United States if a company has a patent on a product or a process it invented or if a company is a public utility. In the case of public utilities, all marketing plans and charges must be approved by the government. In privately owned companies where monopolies occur, the marketer's challenge is to maintain the uniqueness of the product while at the same time discouraging other companies from entering the market. See also monopsony; oligopoly.

A monopoly is a market condition in which a single seller controls the entire output of a particular good or service. A firm is a monopoly if it is the sole seller of its product and if its product has no close substitutes. Close substitutes are those goods that could closely take the place of a particular good; for example, a Pepsi soft drink would be a close substitute for a Coke drink, but a juice drink would not. The fundamental cause of monopoly is barriers to entry; these are technological or economic conditions of a market that raise the cost for firms wanting to enter the market above the cost for firms already in the market or otherwise make new entry difficult. If the barriers to entry prevent others firms from entering the market, there is no competition and the monopoly remains the only seller in its market. The seller is then able to set the price and output of a particular good or service.

A monopoly, in its pure form, is actually quite rare. The majority of large firms operate in a market structure of oligopoly, which means that a few sellers divide the bulk of the market. People often have the impression that the goals of a monopolist are somehow evil and grasping while those of a competitor are wholesome and altruistic. The truth is that the same motives drive the monopolistic firm and the competitive firm: Both strive to maximize profits. A basic proposition in economics is that monopoly control over a good will result in too little of the good being produced at too high a price. Economists have often advocated antitrust policy, public enterprise, or regulation to control the abuse of monopoly power.

Barriers to Entry

For a monopoly to persist in the long run, barriers to entry must exist. Although such barriers can take various forms, they have three main sources:

1. A key resource is owned by a single firm.
2. The government gives a single firm the exclusive right to produce a specific good.
3. The cost of production makes a single producer more efficient than a large number of producers.

Monopoly Resources. The first and simplest way for a monopoly to come about is for a single firm to own a key resource. For example, if a small town had many working wells owned by different firms, no firm would have a monopoly on water. If, however, there were only one working well in town, the firm owning that well would be considered a monopoly. Although exclusive ownership of a key resource is one way for a monopoly to arise, monopolies rarely come about for this reason.

Government-Created Monopolies. In many cases, monopolies have arisen because the government has given a firm the exclusive right to sell a particular good or service. For example, when a pharmaceutical company discovers a new drug, it can apply to the government for a patent. If the patent is granted, the firm has the exclusive right to produce and sell the drug for a set number of years. The effects of such a government created monopoly are easy to see. In the case of the pharmaceutical company, the firm is able to charge higher prices for its patented product and, in turn, earn higher profits. With these higher profits, the firm is able to complete further research in its quest for new and better drugs. The government can create a monopoly when, in doing so, it is in the interest of the public good.

Natural Monopolies. A natural monopoly occurs when a single firm can supply a good or service to an entire market at a lesser cost than could two or more firms. An example of a natural monopoly is the distribution of water in a community. To provide water to residents, a firm must first put into place a network of pipes throughout the community. If two or more firms were to compete in providing the water distribution, each would have to pay the fixed cost of building a network. In this case, the average total cost of water is lowest when one firm serves the entire market.

Monopoly Versus Competition

The major difference between a monopoly and a competitive firm is the monopoly's ability to influence the price of its output. Because a competitive firm is small relative to the market, the price of its product is determined by market conditions. On the other hand, because a monopoly is the sole producer in its market, it can often alter the price of its product by adjusting the quantity it supplies to the market.

An example of a company that garnered monopoly power is the case of Microsoft. In 2000, in an antitrust lawsuit brought against Microsoft, a U.S. federal court judge ruled against the company. Microsoft, a computer company, had established first MS-DOS and later Windows as the dominating operating system for personal computers. Once it had achieved a position of strength in the market, would-be competitors faced insurmountable hurdles. Software developers face large costs for every additional operating system to which they adapt their applications. Because Microsoft had the dominant operating system, any rival personal computer operating system would have only a handful of applications, compared to tens of thousands of applications for Microsoft's Windows system. This applications barrier to entry gave Microsoft enduring monopoly power.

The judge's ruling in the case made it clear that, besides being illegal, Microsoft's monopoly was not in the public interest and legal measures would be put into place in order to break the monopoly that Microsoft had created.

Bibliography

Auld, D., Bannock, G., Baxter, R., and Rees, R. (1993). The American Dictionary of Economics. New York: Facts on File.

"Busted." (1999). The Economist. 353(8145): 21, 23.

Heillbroner, Robert, and Thurow, Lester. (1994). Economics Explained—Everything You Need to Know About How the Economy Works and Where It Is Going. Parsippany, NJ: Simon & Shuster.

Mankiw, G. (1998). Principles of Economics. New York: Dryden Press.

[Article by: MICHAEL W. SPAHR]

noun

Exclusive control or possession: corner. See control/uncontrol, owned/unowned.

Definition: something held, owned exclusively
Antonyms: distribution, joint-ownership, scattering, sharing

The exclusive ownership or control of a resource; in economics, the provision of a good or service by a single supplier who then has the power to set prices, since competition does not operate. In practice, a monopoly occurs where one firm controls most of the output of a particular industry, but it is also common to find a small number of firms dominating the market. Such firms may agree, formally or informally, to limit competition between themselves—in other words, to set up a cartel. Legal prohibition of monopolies is common in capitalist economies, so that firms have to seek new products rather than establishing a monopoly if they wish to continue to grow in the domestic market. In fact, industrial diversification of this type makes sense, since a single-product firm is vulnerable to a fall in the demand for its product.

For more information on monopoly, visit Britannica.com.

Monopoly occurs when a single seller or provider supplies all of a particular product or service. Typically, the term is used to describe a private, commercial situation—a market containing only one seller in a private enterprise economic system. Non-business sources of supply also can hold monopoly power, such as when the government owns the only provider of a product and precludes others by law. Government also can grant exclusive right to a single business entry or group to produce a product or service, thereby creating a monopoly, albeit a private one. A monopoly thus can be legal when a government determines who will produce. Other monopolies may be technological, whereby economies of scale in production lead to decreasing average cost over a large range of output relative to demand. Under these conditions, one producer can supply the entire market at lower cost per unit than could multiple producers. This is the case of a "natural monopoly," which reflects the underlying cost structure for firms in the industry. Monopoly also can stem from mergers of previously independent producers.

The definition of monopoly requires definition of a "product" to determine whether alternative suppliers exist. With no close substitutes, the supplier has monopoly power. The price elasticity of demand, measured as the percentage change in quantity of the product demanded, divided by percentage change in price, indicates the likely proximity of near substitutes; the lower the price elasticity of demand in absolute value, the greater is the ability of the monopolist to raise the price above the competitive level.

A social and political hostility toward monopoly had already developed in Western Europe long before economists developed a theoretical analysis connecting monopoly power to inefficient use of resources. Aristotle, for example, called it unjust. Large-scale enterprise was rare in manufacturing before the nineteenth century, but local producers and workers sought to protect their incomes through restrictions on trade. Capitalism evolved over time, superimposed on preexisting economic and social relationships. During this evolution, economic literature focused frequently on the abuses of monopoly, but without specificity. Well before large manufacturing firms formed, the nation-state granted monopoly rights to colonial trade and domestic activities, often creating resentment toward all forms of monopoly related to royal favoritism. England's Statute of Monopolies (1623) reflected this resentment by limiting governmental grant of monopoly power.

The writings of Adam Smith, his contemporaries, and his nineteenth-century descendents display antipathy toward monopoly, an antagonism perhaps more pronounced in England than elsewhere. This antagonism extended to situations of a few sellers and to practices designed to limit entry into an industry, as well as monopoly per se. English common law generally found abuses of monopoly illegal, but the burden fell upon the aggrieved to bring suit. The United States followed English common law, though that law was really a multitude of laws.

In the 1830s, August Cournot formalized the economic analysis of monopoly and duopoly, apparently the first to do so. His analysis—not very well known among economists of the nineteenth century—showed that profit maximizing, monopoly firms produce less and charge a higher price than would occur in competition, assuming that both industry structures have the same cost condition. It also led eventually to the demonstration, within the context of welfare economics, that single-price monopoly reflects underlying cost structures. Price discrimination, though prohibited and vilified, might lead to a competitive, single-price level of output and efficiency. Cournot's static analysis did not take into account the effect of firm size on technological change, one potential benefit of large firms able to invest in research and development.

Public outcry about trusts—an organizational form associated with mergers that create large firms with substantial market power in many industries—led American legislators to pass the Sherman Antitrust Act in 1890. This act was the first major federal antitrust legislation in the United States and remains the dominant statute, having two main provisions. Section one declares illegal every contract or combination of companies in restraint of trade. Section two declares guilty of misdemeanor any person who monopolizes, or attempts to monopolize, any part of trade or commerce. The Clayton Act of 1914 prohibited a variety of actions deemed likely to restrict competition. Early legislation and enforcement of antitrust law reflected popular opposition to monopoly. Better understanding of economic theory and the costs of monopoly, however, gradually transformed the policy of simply opposing monopoly (antitrust) into one that more actively promotes competition. When the promotion of competition was likely to result in firms too small to exhaust economies of scale, public policy moved to regulate the natural monopoly, presumably to protect consumers from abuse of monopoly power.

Formal economic analysis of monopoly locates that industry structure at the far end of the spectrum from competition. Both are recognized as stylized types, useful in determining the extreme possibilities for industry price and output. Competitive and monopolistic models are relatively simple, because each participant is assumed to act independently, pursuing optimizing behavior without consideration of the likely reaction of other participants. The limitations of monopoly theory in predicting behavior of actual firms stimulated work on imperfect competition. Numerous case studies of American industry structure in the mid-twentieth century yielded detail about firm behavior, but no universally accepted theory.

More recently, developments in game theory permit better analysis of the interdependent behavior of oligopolistic firms. Game theory analyses during the last two decades of the twentieth century—though lacking a unique solution and easy generalizations—also permit more dynamic examination of behavior. This includes considering how a monopolist might behave strategically to maintain monopoly position. Thus, a firm might behave so as to forestall entry. Game theory models have led to reevaluation of the effects of various practices, creating a more complex interpretation of the relationship between industry structure and economic efficiency.

Bibliography

Church, Jeffrey, and Roger Ware. Industrial Organization: A Strategic Approach. Boston: Irwin McGraw-Hill, 2000.

Cournot, Antoine Augustin. Researches into the Mathematical Principles of the Theory of Wealth. New York: Augustus M. Kelley, 1971.

Ellis, Howard, ed. A Survey of Contemporary Economics. Philadelphia: Blakiston, 1948. See especially the article by John Kenneth Galbraith, "Monopoly and the Concentration of Economic Power."

Neale, A. D., and D. G. Goyder. The Antitrust Laws of the U.S.A.: A Study of Competition Enforced by Law. New York: Cambridge University Press, 1980.

Schumpeter, Joseph A. History of Economic Analysis. New York: Oxford University Press, 1994.

Stigler, George, and Kenneth Boulding, eds. Readings in Price Theory: Selected by a Committee of the American Economic Association. Chicago: Richard D. Irwin, 1952. See especially the article by J. R. Hicks, "Annual Survey of Economic Theory: The Theory of Monopoly."

Tirole, Jean. The Theory of Industrial Organization. Cambridge, Mass.: MIT Press, 1988.

Monopoly and competition are diametric terms used to describe complex relations among firms in a single industry. Simply put, monopoly is the exclusive control by one firm or group of firms of the means of producing or selling a commodity or service. As sole supplier, the monopolist can set any price, provided the sales generated are acceptable. Generally that price will be beyond production costs, and it will return profits in excess of normal return on investment.

When Adam Smith (1723–1791) wrote his sustained attack on monopolies in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he did not have single-firm monopolies in mind. These are relatively rare, except for those established by state policy or subject to state regulation. Rather, Smith directed his criticism toward multifirm industries with statutory protection, like medieval guilds.

Medieval Competition

The medieval economy appears to have had a positive aversion to competition, which occurs in a free or atomistic form when the number of producers or sellers in a single industry is so large that each seller's share of the market is too small to affect the market share or income of any competitor. Thus, each seller must adjust output and price to reflect established market conditions. These conditions are affected, in turn, by the ease of entry into the industry, the concentration of sellers in the industry, and the degree of product differentiation in the industry. Given the widespread medieval presumption of fixed resources and limited growth, where pure competition would lead to failure and suffering, these conditions had to be regulated. So, medieval polities opted for monopolistic structures.

Monopoly constituted a form of political protection in most sectors of the medieval economy. Manorial agriculture relied on the guaranteed tenure of peasants on the land and the guaranteed rights of landlords, both of which were types of monopoly. Guilds strictly regulated access to markets and differentiation of products, thus establishing monopolies in most medieval industries. Shipping corporations exercised monopoly rights over transportation along certain routes, such as the Alpine passages. Merchant companies received extraction-and-purchase monopolies for metal ores from mines in certain regions, such as Tyrol or Saxony, in some instances expanding these to near domination of entire industries, as by the Fugger in copper or the Höchstetter in mercury. Nearly all corporations sought monopoly rights for themselves. In most cases, these were thought to guarantee the shared interests of all, producers and consumers alike.

Early Modern Opposition

Attitudes began to change as early as the fifteenth century. More accurately, attitudes began to be recorded, published, and preserved more consistently at this time. Merchant companies came under suspicion of manipulating prices through monopoly. The 1425–1429 guild rising in the south German city of Constance demanded the dissolution of commercial firms, and the Reformatio Sigismundi (1438–1439) reflected this sentiment. (The Reformatio Sigismundi, a document attributed to the Emperor Sigismund [ruled 1433–1437], set forth a program of social and ecclesiastical reform within the Holy Roman Empire. Though not accepted in its day, many of its ideas resonated in the Protestant Reformation a century later.) Complaints multiplied against "monopolists," who hoarded commodities to keep prices artificially high. By the sixteenth century, "monopoly" had become a clarion call of opposition not only to monopolies in the strict sense, but also to cartels, syndicates, hoarders, and usurers who did not deserve it, however questionable their dealings.

Matters came to a head in the Holy Roman Empire, where large mercantile companies, such as the Fugger, Rehlinger, and Höchstetter, engaged in interest-bearing credit and investment transactions as well as price-manipulating monopolies and cartels to increase their profits. Such activities inspired opposition from many strata of society, not only artisans and peasants but also merchants and princes, all of whom saw their expenses rise and incomes fall within the environment of the "price revolution" of the sixteenth century. They found a compelling spokesman in Martin Luther (1483–1546), who viewed such commercial enterprises with a "peasant's mistrust." He wrote and preached repeatedly against interest and usury. His 1524 pamphlet "Von Kaufshandlung und Wucher" lumped monopoly among these other abuses according to the rationale that any price beyond a just price constituted usury—a violation of divine law.

By this time the issue had already engaged the attention of the imperial government for more than a decade. At the urging of estates in the territories of the Hanseatic League and Franconia, centers of opposition to monopolistic practices, the Imperial Diet of 1512 first considered limiting the activities of the great mercantile houses. In 1523, the Reichsfiskal, an institution of the imperial government charged with overseeing taxation and expenditures, lodged a formal complaint against the monopolistic practices of six Augsburg firms, the Fugger above all others. Only the refusal of Emperor Charles V (ruled 1519–1558) to support the measure—prompted by the personal influence of his banker, Jacob Fugger himself—prevented the measure from becoming law. Yet the antimonopoly forces were not ready to admit defeat. The Reichsfiskal renewed its complaint and brought the matter before the Imperial Diet of Augsburg in 1530. Its members moved to form a commission, which prepared a report for the "common good" on the monopolistic abuses of these great companies. It referred specifically to their trade in Oriental spices and metal ores, their use of interest-bearing instruments and transactions, and their manipulation of prices through speculation and hoarding. These techniques allowed the monopolists to alter market conditions in such a way as to unjustly inflate their profits from these enterprises, thus driving their more modest competitors out of business and the "common man" into the streets. The report also proposed that monopolistic practices be forbidden by law, that commercial firms be limited in size, that imported goods be subjected to price controls, that imperial subjects be forbidden to engage in overseas enterprise, and that foreign merchants in the empire be similarly regulated.

In the midst of such dangerous opposition, mercantile interests found a spokesman in Conrad Peutinger (1465–1547), merchant son, universitytrained jurist, Augsburg councillor, and renowned humanist. In a 1530 legal opinion, he defended monopoly as essential to the economic well-being of the nation. Through their entrepreneurship and audacity the accused monopolists drew international trade to the empire and, he argued, created profit and advantage for princes and plebeians alike. Their firms traded in large volumes of goods, thus lowering prices. Their capacity to concentrate capital enabled them to undertake ventures that were too costly or risky for smaller competitors. He argued that risk and profit should be linked. Indeed, the pursuit of individual advantage in economic life was not opposed to the common good, rather contributed directly to it and, as such, was both economically and morally justified. Peutinger became one of the first advocates of a truly modern economic ethos. Whether his arguments had any immediate bearing cannot be determined. Emperor Charles V saw fit to let the matter die an administrative death.

Ubiquitous Monopolies

The resort to monopolies—as well as opposition to them—continued in the Holy Roman Empire and elsewhere. Inspired by mercantilist thought, which emphasized protectionist legislation to shield domestic industries from competition, German princes granted production monopolies as a privilege to German manufacturers. Indeed, the catalogue of princely prerogatives, referred to collectively as Regalien, included the granting of monopoly rights. Although denied to the Holy Roman emperor by the Treaty of Westphalia (1648), these prerogatives came into increasingly frequent use among territorial princes who were anxious to expand their power and increase their revenue. Nor were the Germans alone. State-sponsored monopolies were a common economic contrivance in Bourbon France and Tudor-Stuart England. Everywhere, trading monopolies played an essential role in commercial and colonial development. They involved the creation of charter trading companies to which the crown gave monopoly rights. The Company of Merchant Adventurers, the Levant Company, and the East India Company used political influence to exclude foreign competitors and limit export quotas in order to maintain market share and stabilize profits. Members paid a fee to trade under the aegis of company direction, a fact that led to bitter resentment among those excluded. An attack on trading companies was launched in Parliament in 1604, but their monopolies were not relaxed until late in the 1600s, when regulation of monopolies was no longer viewed as essential to commercial security. Monopolies were not limited to commerce. The reign of Elizabeth (ruled 1558–1603) witnessed the expansion of the patent system as a spur to English manufacturing, whereby patents were granted the sole right to produce a given product by a given process, in effect monopoly control of a certain manufacturing process. Reliance on monopolies did not yield to faith in competition until physiocratic thinking made its influence generally felt in the course of the eighteenth century.

The early modern economy relied to a surprising extent on monopoly and monopolistic practices. Their effects were not uniformly deleterious. Yet the period initiated a passionate debate about commercial activities and a turn toward freer competition that continues to this day.

Bibliography

Aubin, Hermann, and Wolfgang Zorn. Handbuch der deutschen Wirtschafts- und Sozialgeschichte. Vol. I. Stuttgart, 1971.

Barbour, Violet. Capitalism in Amsterdam in the Seventeenth Century. Ann Arbor, Mich., 1950.

Barge, Hermann. Luther und der Frühkapitalismus. Gütersloh, 1951.

Blaich, Fritz. Die Reichsmonopolgesetzgebung im Zeitalter Karls V. Stuttgart, 1967.

Braudel, Fernand. Civilization and Capitalism, 15th–18th Century. Vol. II. New York, 1982.

Ekelund, Robert B. Politicized Economies: Monarchy, Monopoly and Mercantilism. College Station, Tex., 1997.

Höffner, Joseph. Wirtschaftsethik und Monopole im 15. und 16. Jahrhundert. Jena, 1941.

Mund, Vernon. Monopoly, a History and Theory. Princeton, 1933.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. New York, 1994.

Strieder, Jakob. Studien zur Geschichte kapitalistischer Organizationsformen: Monopole, Kartelle und Aktiengesellschaften im Mittelalter und zu Beginn der Neuzeit. Munich, 1925.

Weber, Max. The Protestant Ethic and the Spirit of Capitalism. London, 1992.

Wrightson, Keith. Earthly Necessities: Economic Lives in Early Modern Britain. New Haven, 2000.

—THOMAS MAX SAFLEY

An economic advantage held by one or more persons or companies deriving from the exclusive power to carry on a particular business or trade or to manufacture and sell a particular item, thereby suppressing competition and allowing such persons or companies to raise the price of a product or service substantially above the price that would be established by a free market.

In a monopoly one or more persons or companies totally dominates an economic market. Monopolies may exist in a particular industry if a company controls a major natural resource, produces (even at a reasonable price) all the output of a product or service because of technological superiority (called a natural monopoly), holds a patent on a product or process of production, or is granted government permission to be the sole producer of a product or service in a given area.

U.S. law generally views monopolies as harmful because they obstruct the channels of free competition that determine the price and quality of products and services offered to the public. The owners of a monopoly have the power, as a group, to set prices, exclude competitors, and control the market in the relevant geographic area. U.S. antitrust laws prohibit monopolies and any other practices that unduly restrain competitive trade. These laws are based on the belief that equality of opportunity in the marketplace and the free interactions of competitive forces result in the best allocation of the economic resources of the nation. Moreover, it is assumed that competition enhances material progress in production and technology while preserving democratic, political, and social institutions.

History

Economic monopolies have existed throughout much of human history. In England a monopoly originally was an exclusive right expressly granted by the king or Parliament to one person or class of persons to provide some service or goods. The holders of such rights, usually the English guilds or inventors, dominated the market. By the early 1600s, the English courts began voiding monopolies because they interfered with freedom of trade. In 1623 Parliament enacted the Statute of Monopolies, which prohibited all but specifically excepted monopolies. With the industrial revolution of the early 1800s, economic production and markets exploded. The growth of capitalism and its emphasis on the free play of competition reinforced the idea that monopolies were unlawful.

In the United States during most of the 1800s, monopolies were prosecuted under common law and by statute as market-interference offenses in an attempt to stop dealers from raising prices through techniques such as buying up all available supplies of a material, or cornering the market. Courts also refused to enforce contracts with harsh provisions that were clearly unreasonable restraints on trade. These measures were largely ineffective.

Government Regulation

Congress intervened after abuses became widespread. In 1887 Congress, pursuant to its constitutional power to regulate interstate commerce, passed the Interstate Commerce Act (49 U.S.C.A. § 1 et seq.) in response to the monopolistic practices of railroad companies. Although competition among railroad companies for long-haul routes was great, it was minimal for short-haul runs. Railroad companies discriminated in the prices they charged to passengers and shippers in different localities by providing rebates to large shippers or buyers to retain their long-haul business. These practices were especially harmful to farmers because they lacked the volume of traffic necessary to obtain more favorable rates. Although states attempted to regulate the railroads, they were powerless to act where interstate commerce was involved. The Interstate Commerce Act was intended to regulate shipping rates. It mandated that charges be fair and made it illegal to discriminate unreasonably among customers through the use of rebates or other preferential devices.

Congress soon moved ahead on another front, enacting the Sherman Anti-Trust Act of 1890 (15 U.S.C.A. § 31 et seq.). A trust was an arrangement by which stockholders in several companies transferred their shares to a set of trustees in exchange for a certificate entitling them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a number of major industries, destroying their competitors. The Sherman Act prohibited such trusts and their anticompetitive practices. From the 1890s through 1920, the federal government used the act to break up these trusts.

The Sherman Act provides for criminal prosecution by the federal government against corporations and individuals who restrain trade, but criminal sanctions are rarely sought. The act also provides for civil remedies for private persons who start an action under it for injuries caused by monopolistic acts. The award of treble damages (the tripling of the amount of damages awarded) is authorized under the act to promote the interest of private persons in safeguarding a free and competitive society and to deter violators and others from future illegal acts.

The Clayton Anti-Trust Act of 1914 (15 U.S.C.A. § 12 et seq.) was passed as an amendment to the Sherman Act. The Clayton Act specifically defined which monopolistic acts were illegal but not criminal. The act proscribed price discrimination, the sale of the same product at different prices to similarly situated buyers, exclusive dealing contracts, sales on condition that the buyer stop dealing with the seller's competitors, corporate mergers, and interlocking directorates (the same people serving on the boards of directors of competing companies). Such practices were illegal only if, as a result, they materially reduced competition or tended to create a monopoly in trade.

The Federal Trade Commission Act of 1914 (15 U.S.C.A. § 41 et seq.) established the Federal Trade Commission, the regulatory body that promotes free and fair competitive trade in interstate commerce through the prohibition of price-fixing arrangements, false advertising, boycotts, illegal combinations of competitors, and other methods of unfair competition.

Congress passed the Robinson-Patman Act of 1936 (15 U.S.C.A. § 13 et seq.) to amend the Clayton Act. The act makes it unlawful for any seller engaged in commerce to directly or indirectly discriminate in the sale price charged on commodities of comparable grade and quality where the effect might injure, destroy, or prevent competition unless the seller discriminated in order to dispose of perishable or obsolete goods or to meet the equally low price of a competitor.

Exemptions

Despite these legal prohibitions, not all industries and activities are subject to them. Labor unions monopolize the labor force and take concerted action to improve the wages, hours, and working conditions of their members. The Clayton Act and the Norris-LaGuardia Act of 1932 (29 U.S.C.A. § 101 et seq.) recognized that unions would be powerless without this monopolistic behavior and therefore made unions immune from antitrust laws.

A government-awarded monopoly, such as the right to provide electricity or natural gas to a region of the country, is exempt from antitrust laws. Government agencies regulate these industries and set reasonable rates that the company may charge.

Sometimes an industry is a natural monopoly. This type of monopoly is created as a result of circumstances over which the monopolist has no power. A natural monopoly may exist where a market for a particular product or service is so limited that its profitable production is impossible except when done by a single plant large enough to supply the whole demand. Natural monopolies are beyond the reach of antitrust laws.

Special interest industries, such as agricultural and fishery marketing associations, banking and insurance industries, and export trade associations, are also immune from antitrust laws. Major league baseball has also been exempted from antitrust laws.

See: Antitrust Law; Combination in Restraint of Trade; Interstate Commerce Commission; Mergers and Acquisitions; Public Utilities; Restraint of Trade.

The exclusive control by one company of a service or product.

Quotes:

"Like many businessmen of genius he learned that free competition was wasteful, monopoly efficient. And so he simply set about achieving that efficient monopoly." - Mario Puzo

This article is about the economic term. For the Parker Brothers board game, see Monopoly (game).

A monopoly (from Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service, in other words a firm that has no competitors in its industry. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. ^[1]

Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; monopolies often have monopsony control of a sector of a market. Likewise, monopoly should also be distinguished from the phenomenon of a cartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel a centralized institution is set up to partially coordinate the actions of several independent providers (which is a form of oligopoly).

A government-granted monopoly, or legal monopoly is sanctioned by the state, often to provide a greater reward and incentive to invest in a risky venture. The government may also reserve the venture for itself, which is called a government monopoly.

It is argued in contemporary monopoly theory that if a monopoly is not protected from competition by government restrictions, then it is subject to potential competition and therefore is not able to gouge consumers without causing competitors to enter the field to take advantage of profit opportunities.

Economic analysis

Primary characteristics of a monopoly

• Single seller: For a pure monopoly to take place, only one company can be selling the goods or service. A company can have a monopoly on certain goods and services but not on others.
• No close substitutes: Monopoly is not merely the state of having control over a product; it also means that there are no close substitutes available that fill the same function as the monopolized good.
• Price maker: Because a single firm controls the total supply in a pure monopoly, it is able to exert a significant degree of control over the price by changing the quantity supplied.

Other common assumptions in modeling monopolies include the presence of multiple buyers (if the firm is the only buyer, it also has a monopsony), an identical price for all buyers, and asymmetric information.

These conditions mean that the company with monopoly does not undergo price pressure from competitors, because there are no competitors. However, it may face pricing pressure from potential competition; if the company raises prices too high, then other firms are enticed to begin competing with the monopoly if they are able to provide the same good, or a substitute good, at a lower price. ^[2] The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".

Price setting for irregulated monopolies

Surpluses and deadweight loss created by monopoly price setting

In economics, a firm is said to have monopoly power if it is not facing a horizontal demand curve (see supply and demand). This is in contrast to a price-taking firm which always faces a horizontal demand curve, and therefore sells little or nothing at prices above equilibrium. In contrast, a business with monopoly power can choose the price at which it wants to sell. If it sets a high price, it may sell less; if it sets a lower price, it will likely sell more; however, this difference is much smaller.

In most markets, falling quantity demanded associated with a price increase is due partly to losing customers to other sellers and partly to customers who are no longer willing or able to buy the product. In a pure monopoly market, only the latter effect is at work. Therefore, the drop in units sold as prices rise may be much less dramatic than one might expect, especially for necessary commodities such as medical care. However, unless the monopoly is a coercive monopoly, there is also the risk of competition arising if the firm sets its prices too high.

If a monopoly can set only one price, it will produce a quantity where marginal cost (MC) equals marginal revenue (MR), as seen on the diagram at right. The monopolist will then set the highest price possible in which the quantity can be sold. It is above the competitive price (Pc) and below the competitive quantity (Qc). This is the optimal price as determined by supply and demand.

As long as the price elasticity of demand (in absolute value) for most customers is less than one, it is advantageous for a firm to increase its prices: it then receives more money for fewer goods. With a price increase, price elasticity tends to rise, and in the optimum mentioned above it will be greater than one for most customers. The following formula gives the relation among price, marginal cost of production and demand elasticity that maximizes a monopoly profit: where (e) is the negative elastic of demand. A monopoly's power is given by the vertical distance between the point at which the marginal cost curve (MC) intersects with the marginal revenue curve (MR) and the demand curve. The longer the vertical distance, (i.e., the more inelastic the demand curve) the greater the monopoly's power, and thus, the larger its profits.

The economy as a whole suffers when monopoly power is used in this way because the extra profit earned by the monopoly will be smaller than the loss in consumer surplus. This difference is known as a deadweight loss.

Calculating monopoly output

The single price monopoly profit maximization problem is as follows:

The monopoly's profit is its total revenue less its total cost. Let the price it sets as a market response be a function of the quantity it produces (Q) P(Q) and let its cost function be as a function of quantity C(Q). The monopoly's revenue is the product of the price and the quantity it produces. Hence its profit is:

Taking the first order derivative with respect to quantity yields:

Setting this equal to zero for maximization:

i.e. marginal revenue = marginal cost, provided

(the rate of marginal revenue is less than the rate of marginal cost, for maximization).

This procedure assumes that the monopolist knows the exact demand function. ^[3]

Monopoly and efficiency

According to standard economic theory (see analysis above), a monopoly will sell a lower quantity of goods at a higher price than firms would in a purely competitive market. In this way the monopoly will secure monopoly profits by appropriating some or all of the consumer surplus: although the higher price deters some consumers from purchasing, most are willing to pay the higher price. Assuming that costs stay the same, this does not lead to an outcome that is inefficient in the sense of Pareto efficiency; no one could be made better off by shifting resources without making someone else worse off. However, overall social welfare declines, because some consumers must choose second-best products.

Negative aspects

It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late eighteenth century United Kingdom, was worth much less in the late nineteenth century because of the introduction of railways as a substitute.

Positive aspects

Some argue that it can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; and once the firm grows too big, it can be dealt with via regulation. When monopolies are not broken through the open market, often a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly, or forcibly break it up (see Antitrust law). Public utilities, often being natural monopolies and less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly. When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market and began to take phone traffic from the less efficient AT&T.

Hotelling's law

Mathematician Harold Hotelling came up with Hotelling's law which showed that there exist cases where monopoly has advantages for the consumer. If there is a beach where customers are distributed evenly along it, an entrepreneur setting up an ice cream stand would naturally place it in the middle of the beach. A competing ice cream seller would do best to place his competing ice cream stand next to it to gain half the market share, but two stalls right next to each other is not an ideal situation for the people on the beach. A monopolist who owns both stalls on the other hand, would distribute his ice cream stalls some distance apart.^[4]

The "natural monopoly" problem

A natural monopoly is defined as a situation in which production is characterized by falling long-run marginal cost throughout the relevant output range. In such situations, a policy of laissez-faire must result in a single seller. The conventional Paretian solution to market failure of this kind is public regulation (in the United States) or public enterprise (in the United Kingdom). Liberals reject both alternatives as being incompatible with important freedoms.^[5].

Historical monopolies

Common salt (sodium chloride) historically gave rise to natural monopolies. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for winning salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "famines" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (the Dead Sea, the Sahara desert) requiring well-organized security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, played a role in the start of the French Revolution, when strict legal controls were in place over who was allowed to sell and distribute salt. Advocates of laissez-faire capitalism, such as the Austrian school, maintain that a salt monopoly would never develop without such government intervention. ^{[citations needed]}

Examples of alleged and legal monopolies

• The salt commission, a legal monopoly in China formed in 758.
• British East India Company; created as a legal trading monopoly in 1600.
• Dutch East India Company; created as a legal trading monopoly in 1602.
• U.S. Steel; anti-trust prosecution failed in 1911.
• Standard Oil; broken up in 1911.
• National Football League; survived anti-trust lawsuit in the 1960s, convicted of being an illegal monopoly in the 1980s.
• Major League Baseball; survived U.S. anti-trust litigation in 1922, though its special status is still in dispute as of 2007.
• United Aircraft and Transport Corporation; aircraft manufacturer holding company forced to divest itself of airlines in 1934.
• American Telephone & Telegraph; telecommunications giant broken up in 1982.
• Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in 2004, which was upheld for the most part by the Court of First Instance of the European Communities in 2007.
• De Beers; settled charges of price fixing in the diamond trade in the 2000s.
• Apple Inc., Accused of forming a Vertical Monopoly, with iPod, iTunes, iTunes Music Store, and the FairPlay DRM System.

Notes and references

1. ^ Blinder, Alan S; William J Baumol and Colton L Gale (June 2001). "11: Monopoly", Microeconomics: Principles and Policy (paperback) (in English), Thomson South-Western, 212. “A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist” 
2. ^ Depken, Craig (23). "10", Microeconomics Demystified (in English). McGraw Hill, 170. ISBN 0071459111. 
3. ^ For a discussion on a monopolist who does not know the demand function, see [1] where a free software is available as well.
4. ^ Hotelling's Law Economyprofessor.com
5. ^ Charles K. Rowley and Alan T. Peacock, Welfare Economics: A Liberal Restatement, York Studies in Economics, Martin Robertson, 1975

Further reading

• Guy Ankerl, Beyond Monopoly Capitalism and Monopoly Socialism. Cambridge,Mass.: Schenkman Pbl., 1978. ISBN0870739387
• Impact of Antitrust Laws on American Professional Team Sports

See also

Market forms

• Monopolistic competition
• Duopoly
• Triopoly
• Monopsony
• Bilateral monopoly
• Oligopoly

Types

• Cartel
• Natural monopoly
• Monopolies of knowledge

Proposed benefits

• The Long Tail
• Economies of scale

Monopolistic practices

• Dumping
• Predatory pricing
• Price discrimination
• Zone pricing

General

• Creative destruction
• Free market
• List of economics topics
• Perfect competition
• Competition regulator

External links

• Monopoly: A Brief Introduction by The Linux Information Project
• Monopoly by Elmer G. Wiens: Online Interactive Models of Monopoly (Public or Private) and Oligopoly

Criticism

• Natural Monopoly and Its Regulation
• The Myth of the Natural Monopoly
• Natural Monopoly and Its Regulation

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - monopol, eneret, matador (spil)

Nederlands (Dutch)
monopolie, Monopoly (spel)

Français (French)
n. - (Écon, fig) monopole, Monopoly

Deutsch (German)
n. - Monopol

Ελληνική (Greek)
n. - μονοπώλιο

Italiano (Italian)
monopolio

Português (Portuguese)
n. - monopólio (m)

Русский (Russian)
монополия

Español (Spanish)
n. - monopolio

Svenska (Swedish)
n. - monopol

中文（简体） (Chinese (Simplified))
垄断, 独占事业, 专卖权

中文（繁體） (Chinese (Traditional))
n. - 壟斷, 獨佔事業, 專賣權

한국어 (Korean)
n. - 독점, 전매품

日本語 (Japanese)
n. - 独占, 専売, 専有, 独占物, 専売品, 専売事業, 独占企業, 独占権

العربيه (Arabic)
‏(الاسم) إحتكار‏

עברית (Hebrew)
n. - ‮שליטה גמורה בענף כלכלי או בסחורה מסוימת, ענף כלכלי או סחורה הנמצאים בשליטה גמורה, חברה בעלת מונופול, שליטה גמורה, מונופול‬

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