What is a monopoly? | American News
A monopoly is a market where one company acts as the sole provider of a good or service.
Firms that create monopolies dominate an industry to the point where other potential competitors cannot enter the market. This gives a business full latitude in setting the price for its product or service. Monopolies can lead to exorbitant prices or inferior products because consumers have no alternative.
A monopoly occurs when one supplier dominates an industry. As the sole supplier, the monopoly firm is free to set the market price for the industry, and consumers – with no viable alternative – have no choice but to take what the monopoly firm offers at the price which she fixes.
In free markets, monopolies are seen as violating the laws of supply and demand. They can lead to inflated prices and lower quality goods. A monopolized market usually becomes unfair and inefficient because the dominant firm has no incentive to keep improving its product or lowering its prices to stay ahead of its competitors.
Concerns about monopolies in the United States began in the 19th century when the railroad industry began to take off. Companies in the same industry began to form trusts, whereby they joined together to form a monopoly, giving them full power over their industry.
In response to public complaints about unfair pricing and trade practices, Congress passed the Sherman Antitrust Act of 1890 to prohibit trusts that imposed “unreasonable” restrictions on trade. This, along with the Federal Trade Commission Act and the Clayton Act, both passed in 1914, constitute the primary federal antitrust laws that remain in effect today.
These laws have since been used to dismantle monopolies. Some of the most famous monopolies include:
- John D. Rockefeller’s Standard Oil Co. Formed in 1870, Standard Oil Co. and Trust took control of up to 95% of the production, processing, transportation and marketing of oil in the United States by eliminating or merging with competitors up to in 1911, when the Supreme Court determined that the company had violated the Sherman Antitrust Act. , forcing Standard Oil to split into 34 independent companies.
- Andrew Carnegie’s Steel Co. Carnegie Steel Co. dominated the steel industry of the late 19th century and became part of the world’s first billion-dollar company when it merged with a group of other steel companies as US Steel Corp. (ticker: X), which remains among the largest steel producers in the world.
- American Tobacco Co. Washington Duke and his sons founded the American Tobacco Co. in 1890 and, through acquisitions and mergers, came to control nearly all of the American tobacco industry with approximately 150 factories. The United States Court of Appeals ultimately found it in violation of the Sherman Antitrust Act and forced the company to dissolve.
- AT&T. AT&T Inc. (T) operated as a legal monopoly in the telephone industry for many decades until 1982 when it was forced to split into eight smaller companies, nearly all of which have since become part again. from AT&T.
- Microsoft. US courts have ruled that Microsoft Corp. (MSFT) held a monopoly in the software industry due to its dominance of operating system software used in International Business Machines Corp. computers. (IBM) and its ability to exclude other software developers by preventing their products from working. be installed on computers with Microsoft’s operating system. Microsoft was eventually forced to end its exclusionary practices.
A monopolistic firm is legally defined as a firm with “significant and enduring market power”. In other words, the ability to raise prices without long-term consequences or the ability to exclude competitors. To be considered a monopoly, a company or group of companies must generally make at least 50% of the sales of its product or service in a geographic area, although some courts require a much higher percentage. This market dominance must also be maintained over a long period of time to be considered monopolistic.
Courts use antitrust laws to determine when a company is operating as a monopoly. They first examine whether a firm has monopoly power in a market by studying the products it sells and what alternatives are available to consumers if the firm were to raise prices.
Courts then investigate how the company maintained its leadership position to determine if it was through improper conduct rather than better product or management practices. It is legal to become a monopoly by providing a better product, but illegal to create a monopoly through exclusionary or predatory practices like supply chain agreements.
Not all monopolies are illegal. Sometimes the government allows a company to operate as a monopoly, known as a legal monopoly.
Legal monopolies are allowed to offer a specific product or service at a government-regulated price. These may be independent private companies regulated by the government or companies managed and regulated by the government. For example, the United States Postal Service has a legal monopoly on mail delivery in the United States. Likewise, sports corporations such as the National Football League are allowed to operate as monopolies outside of US antitrust laws.
Monopolies can exert undue influence on their markets and force consumers to accept expensive or inferior goods. In a perfectly competitive market, firms that raise prices should experience some loss of market share to low-cost competitors, but with a monopoly there are no competitors to turn to. This can reduce the incentive for monopolies to pay attention to customer needs or satisfaction. They can also restrict the salaries of their employees who cannot easily switch to a competing company.
Monopolies were a major concern in the late 19th and early 20th centuries, but since the enactment of antitrust laws they have become less prevalent today. U.S. courts can stop mergers that would restrict trade and can force large conglomerates to morph into separate small businesses. But if consumers and the courts stop paying attention, many companies could become market-dominant behemoths.
Most monopolies are illegal under US law because they impede free trade and generally harm consumers. When one company or group of companies dominates a market, they can impose unfair prices or force consumers to accept inferior products. There are exceptions, however, as regulators have allowed organizations such as the National Football League, Major League Baseball, and the United States Postal Service to operate as monopolies, as they consider such arrangements to be within the best interests of government and the public.
The main characteristics of a monopoly include the ability to set and raise prices at will without negative consequences and to foreclose competitors from the market in the long term. US courts also generally define a monopoly as controlling at least 50% of sales in a given market and geographic location.