| This article is about economic monopoly. For the board game, see Monopoly (game). For the game show based on this board game, see Monopoly (game show).
In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. Monopolies are
characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.
Monopoly should be distinguished from monopsony, in which there is only one
buyer of the product or service; it should also, strictly, be distinguished from the (similar) 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).
Forms of monopoly
Monopolies are often distinguished based on the circumstances under which they arise; the main distinctions are between a
monopoly that is the result of law (government-granted monopoly and government monopoly) alone; one that arises from the cost structure of the industry (natural monopoly); and one that arise by other means (eg one firm simply
outcompeting all other firms; illegal behaviour; etc). Advocates of economic liberalism assert that a more fundamental way of classifying monopolies is to distinguish
those that arise and exist due to violation of the principles of a free
market (coercive monopoly) from those that arise and are
maintained by consistently outcompeting all other firms.
Legal monopoly
A monopoly based on laws explicitly preventing competition is a legal monopoly or de jure monopoly. When such a monopoly is granted to a private party, it is a government-granted monopoly; when it is operated by
government itself, it is a government monopoly or state monopoly. A government monopoly may exist at different levels of
government (eg just for one region or locality); a state monopoly is
specifically operated by a national government.
An example of a "de jure" monopoly is AT&T, which was granted monopoly power
by the US government, only to be broken up in 1982 following a Sherman Antitrust suit.
Natural monopoly
Main article: Natural monopoly
A natural monopoly is a monopoly that arises in industries where economies of scale are so large that a single firm can supply the entire market without exhausting them.
In these industries competition will tend to be eliminated as the largest (often the first) firm develops a monopoly through its
cost advantage. In these industries monopoly may be more economically efficient than competition, although because of potential dynamic efficiencies this
is not necessarily clear-cut.
Natural monopoly arises when there are large capital costs relative to variable costs, which arises
typically in network
industries such as electricity and water. It should be distinguished from network effects,
which operate on the demand side and do not affect costs. Counter-intuitively, the case of a monopolization of a key source of a
natural resource is not considered a natural monopoly, because it
is based on the running down of natural capital rather than the
amortization of an investment in physical or human capital.
Whether an industry is a natural monopoly may change over time through the introduction of new technologies. A natural
monopoly industry can also be artificially broken up by government, although (eg electricity liberalization, eg Railtrack)
the results are at best mixed. Advocates of free markets, such as
libertarians, assert that a natural monopoly is a practical impossibility, and, given that a monopoly is a persistent rather than
a transient situation, that there is no historical precedent of one ever existing. They say that the idea of "natural monopoly"
is mere theoretical abstraction to justify expanding the scope of government, and that it in the case of nationalization or
deprivatization it is the government intervention itself that creates a monopoly where one did not actually exist.
Local monopoly
A local monopoly is a
monopoly of a market in a particular area, usually a town or even a smaller locality: the term is used to differentiate a
monopoly that is geographically limited within a country, as the default assumption is that a monopoly covers the entire industry
in a given country.
Monopolistic competition
Industries which are dominated by a single firm may allow the firm to act as a near-monopoly or "de facto monopoly", a practice known in economics as monopolistic competition. Common historical examples arguably include corporations such as
Microsoft and Standard Oil
(Standard's market share of refining was 64% in competition with over 100 other refiners at the time of the trial that resulted
in the government-forced breakup). Practices which these entities may be accused of include dumping products below cost to harm competitors, creating tying
arrangements between their products, and other practices regulated under Antitrust
law.
Large corporations often attempt to monopolize markets through horizontal integration, in which a parent company consolidates
control over several small, seemingly diverse companies (sometimes even using different branding to create the illusion of
marketplace competition). Such a monopoly is known as a horizontal monopoly. A magazine publishing firm, for example, might publish many different magazines on
many different subjects, but it would still be considered to engage in monopolistic practices if the intent of doing this was to
control the entire magazine-reader market, and prevent the emergence of competitors.
A monopoly arrived at through vertical integration is
called a vertical monopoly. A common example is vertical
integration of electricity distribution with
electricity generation, which is common because it
reduces or eliminates certain costly risks.
Coercive monopoly
Main article: coercive monopoly
A coercive monopoly is one that arises and whose existence is maintained as the result of any sort of activity that violates
the principle of a free market and is therefore insulated from competitive
forces that would otherwise be a potential threat to its superior status. The term is typically used by those who favor laissez-faire capitalism.
Economic analysis
Primary characteristics of a monopoly
- Single Seller
- In a pure monopoly is an industry in which a single firm is the sole producer of a good or the sole provider of a
service. This is usually caused by a blocked entry
- No Close Substitutes
- The product or service is unique.
- Price Maker
- In a pure monopoly a single firm controls the total supply of the whole industry and is able to exhert a significant degree
of control over the price, by changing the quantity supplied.
- Blocked Entry
- The reason a pure monopolist has no competitors is that certain barriers keep would be competitors from entering the
market. Depending upon the form of the monopoly these barriers can be economic, technological, legal, or of some other type of
barrier that completely prevents other firms from entering the market
Monopolistic pricing
In economics a company is said to have monopoly power if it faces a downward sloping demand curve (see supply and demand). This is in contrast to a price taker that
faces a horizontal demand curve. A price taker cannot choose the price that they sell at, since if they set it above the
equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of
buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly
power can choose the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell more.
If a monopoly can only set one price it will set it where marginal
cost (MC) equals marginal revenue (MR) as
seen on the diagram on the right. This can be seen on a supply and
demand diagram for the firm. This will be at the quantity Qm and at the price Pm. This is above the
competitive price of Pc and with a smaller quantity that the competitive quantity of Qc. The profit the
monopoly gains is the shaded in area labeled profit.
As long as the price elasticity of demand
(in absolute value) for most customers is less than one, it is very advantageous to increase the price: the seller gets more
money for less goods. With an increase of the price the price elasticity tends to rise, and in the optimum mentioned above it
will for most customers be above one. A formula gives the relation between price, marginal cost of production and demand
elasticity which maximizes a monopoly profit:  (known as Lerner Index).
The economy as a whole loses out when monopoly power is used in this way, since the extra profit earned by the firm will be
smaller than the loss in consumer surplus. This different is known
as a deadweight loss.
Calculating monopoly output
The single price monopoly profit maximisation 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 maximisation:
i.e. marginal revenue = marginal cost, provided
 (the rate of marginal revenue is less than the
rate of marginal cost, for maximisation).
Monopoly and efficiency
In 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, as 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 which 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, total social welfare
declines compared with perfect competition, because some consumers must choose second-best products.
It is also often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants",
because they don't have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can
raise the potential value of a competitor 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 that monopoly to new entrants, or because of the availability in the longer-term of substitutes in
other markets. For example, a canal monopoly in late eighteenth century Britain was worth a lot more than in the late nineteenth century, because of the introduction
of railways as a substitute.
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 then be dealt with via regulation. (This is a rather optimistic view of how effectively regulation can substitute for competition.)
When monopolies are not broken through the open market, often a government will step in to either 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 started to take phone traffic from the less efficient AT&T.
Historical examples
Salt
Until common salt (sodium
chloride) was mined in quantity in comparatively recent times, its availability was subject to the vagaries of climate and
environment. A combination of strong sunshine and low humidity or an extension of peat marshes were necessary for winning salt
from the sea - the most plentiful source - by solar evaporation or boiling. Mines and inland salt springs being scarce and often
located in hostile areas like the Dead Sea or the salt mines in the Sahara desert, they required well-organised security for
transport, storage and highly monopolised distribution. Changing sea levels flooded many of these sources during certain periods
and caused salt 'famines' and communities were left to the mercy of those who monopolised these few inland sources. "La Gabelle,"
a notoriously high tax levied upon salt, resulted in the French revolution and is possibly the most cruel example in recent
history. Anyone was allowed to purchase salt, however, this was not the case as far as who was allowed to sell and distribute
salt as this was subject to strict legal controls. Advocates of laissez-faire capitalism, such as the Austrian school, maintain that a salt monopoly would never develop without such government intervention.
Just as with other products and services commonly provided by voluntary interactions within the economic market such as food,
water and shelter, mankind can not live without salt, and thus monopolising salt is semantically identical to the free-market
distribution of these commodities. Institutions generally seen as abominations against individual rights such as slavery were only one of the accepted "facts of life" until very recently.
Those who advocate individual liberty today should be conciously and constantly vigilant to prevent coercive monopolies from
maintaining sole distribution of such vital requirements for human life.
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