A monopoly refers to the fact that one company and its product offering dominate a sector or industry. Monopolies can be considered an extreme consequence of the free market economy, in the absence of restrictions or regulations, where a company or economic group becomes large enough to monopolize the entire (or almost all) market – goods, supplies – raw materials, infrastructure, and technology- of a particular type of product or service. The term monopoly is frequently used to describe an entity that has complete (or almost complete) control of a market.
Characteristics monopolies
Monopolies technically enjoy an unfair advantage over their competition, since they are (either the sole provider of the good or service, or they are the provider that controls the majority of the market for that product). Although monopolies may differ from industry to industry, they tend to share similar characteristics including:
High barriers to entry
Competitors are not able to enter the market and the monopoly can easily prevent the existence of competition by developing a strong foothold in the industry by purchasing potential competitors. (An example of this would be Facebook’s purchase of Instagram and Whatsapp).
The only seller
There is only one seller in the market, meaning that the company becomes the same industry it serves.
Defines the market price
The company that operates a monopoly decides the price of the product it will sell, without any competition that can counterbalance it and lower prices. As a result monopolies can raise prices at will.
Scale economics
A monopoly can often produce at a lower cost than smaller companies. Monopolies can purchase large quantities of inventory, for example at a discounted volume. As a result, a monopoly can lower its prices so much that smaller competitors cannot survive. Essentially, monopolies can engage in price wars due to the scale of their manufacturing operations, distribution networks, as well as warehouses and shipping networks, so they can drive the prices of their products much lower than any other competitor. of the industry.
pure monopolies
A company with a pure monopoly means that that company is the only seller in the market and has no other substitutes. For many years, Microsoft Corporation had a monopoly on the software and operating systems that were used on computers. Also, with pure monopolies, there are high barriers to entry, such as significant costs to undertake the same type of business that the monopoly company owns, making it difficult for competitors to enter the market.
Monopolistic competition
When there are multiple sellers in an industry, with many similar substitutes for the goods being produced, and the companies retain some power in the market, this is called monopolistic competition. In this case, an industry has so many services that offer similar products or services, but their offerings are not perfect substitutes.
In monopolistic competition, barriers to entry and exit are typically low, and companies try to differentiate themselves through lower prices and marketing strategies. However, since products are very similar among different competitors, it is difficult for consumers to know which product is the best. Some examples of monopolistic competition include retail stores, restaurants, and beauty salons.
Natural monopolies
A natural monopoly develops when a company becomes a monopoly due to the high costs of entrepreneurship in the industry. Also, natural monopolies can arise in industries that require unique raw materials, technology, or a specialized industry, where only one company can satisfy the needs.
Companies that have patents on their products, which prevent competitors from developing the same product in a specific field, have a natural monopoly. Patents allow the company to make money for multiple years without the fear of competition that can quickly recover the investment made in terms of capital, infrastructure, research and development. Pharmaceutical companies have patents on their inventions for several years so that other companies are forced to invest in innovation and research.
There are also monopolies in companies that provide public services such as water and electricity. In this case, governments grant some companies the right to monopoly because in general terms it is much more practical and efficient for a single company to control the provision of the service in a single area, due to the large investments in infrastructure that are made. . It is difficult to imagine what service delivery would be like if multiple companies could co-locate their infrastructure so that consumers were free to choose their utility provider.
Why monopolies are illegal
A monopoly is characterized by the absence of competition, which leads to high costs for consumers, a provision of services and goods of lower quality, and corrupt behavior within companies. A company that dominates a single sector can use this advantage to its own advantage and to the detriment of the general interest. This can lead the company to set prices at its discretion, overriding the laws of supply and demand, preventing the entry of new competitors into the market and discouraging innovation and competition for the development of better products and services. A monopolized market often leads to a situation of injustice, inequality and inefficiency.
Business mergers and acquisitions of companies in the same sector are widely monitored by governments, because they can lead to the consolidation of monopolies that affect consumers and social well-being. This is why antitrust laws exist to try to limit the market power of these large companies.
Antitrust laws
Antitrust laws and other regulations are intended to prevent monopolistic operations from existing in the market, protecting consumers, prohibiting such practices in commerce, and ensuring that the market remains open and competitive.
In 1890, the Sherman Act was introduced in the United States to protect consumers from monopolistic practices. The law was approved in the Senate by 51 votes to one and in the House of Representatives it won unanimous support with 242 votes to zero.
In 1914, two additional laws were introduced in the United States to protect consumers. The Clayton Act created new regulations for business mergers and created the Federal Trade Commission, which establishes standards and practices so that laws are enforced and violators can be brought to justice.
Breaking monopolies
As a consequence of these laws, the oil giant Standard Oil Company was divided, which ended up divided into several companies that competed with each other, and the Tobacco Company was also divided.
In the history of the United States there have been rulings against companies such as Microsoft, AT & T, since being companies with extensive market power they limited consumer options and generated very high rents on their products.
Today, United States anti-trust laws target companies like Amazon, Facebook and Google, as they have accumulated great market power in the last decade.
