What is a ‘Monopoly’
In business terms, a monopoly refers to a sector or industry dominated by one corporation, firm or entity.
Monopolies can be considered a extreme result of free market capitalism: Absent any restriction or restraints, a single company or group an enterprise becomes big 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’
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.
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 a good 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. It’s allowed because these suppliers incur large costs in producing power or water and providing these essentials to each local household and business, and it’s 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 electric 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.
In 1890, the Sherman Anti-Trust Act became the first legislation passed by the U.S. Congress to limit monopolies. The Sherman Anti-Trust 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 anti-trust 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 simply suppress strong companies.
Breaking Up Monopolies
The Sherman Anti-Trust Act has been used to break up large companies over the years, including Standard Oil Company and American Tobacco Company.