INTRODUCTION Monopoly is an economic situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price. One or more of the following elements are of great importance in establishing a monopoly in a particular industry: (1) Control of a major resource necessary to produce a product, as was the case with bauxite in the pre-World War II aluminum industry. (2) Technological capabilities that allow a single firm to produce at reasonable prices all the output of a particular commodity or service, a situation sometimes described as a “natural” monopoly; (3) Exclusive control over a patent on a product or on the processes used to produce the product. (4) A Government franchise that awards a company the sole right to produce a commodity or service in a given area.
HISTORICAL BACKGROUND Economic monopolies have existed throughout much of human history. In ancient and medieval times dire scarcity of resources was common and affected the lives of most human beings. When resources are extremely scarce, little room exists for a multiplicity of producers for many products and services. The medieval guilds, for example, were associations of merchants or artisans that controlled output, set terms for entering a trade, and regulated prices and wages. As nation-states began to emerge in the late Renaissance era, monopoly proved to be a useful device for sovereigns, ever strapped for the cash necessary to sustain their armies, courts, and extravagant life-styles. Monopoly rights were awarded to court favorites for manufacture and trade in basic essentials such as salt and tobacco.
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In all such charters, the sovereign received an ample share of the profits. Most major European nations also granted monopoly powers to private trading companies to stimulate exploration and the discovery of new lands. The awarding of monopoly power by the sovereign to private companies and court favorites, however, led to many abuses. In England, Parliament finally passed a Statute of Monopolies (1624) that sharply curtailed the monarch’s right to create private monopolies in domestic trade.
This act did not apply to the monopoly powers granted to companies formed for exploration and colonization. Two developments, both English in origin, brought about a reversal of these conditions, leading to a competitive-based economic order in the early 19 th century. First was the emergence through English common law of a hostile attitude toward private combinations that were in restraint of trade. Under the common law, private agreements of a monopolistic nature that restrained trade were not enforceable. This common-law hostility toward monopoly was important in Britain and America. The second development was the expansion of production that followed the Industrial Revolution, combined with the ideas of the British philosopher and economist Adam Smith on private property, markets, and the free play of competition, which became the dominant influences shaping economic life in the first half of the 19 th century.
This period most resembled Smith’s textbook “model” of a competitive economic order-one in which business firms in nearly all industries were many in number and small in size. In the late 19 th century the tendencies inherent in a free competitive economic order brought about new changes. In Britain, the United States, and other industrial nations, giant business firms began to emerge and dominate the economy. In part, this stemmed from the empire-building tactics of the “captains of industry,” such as the American entrepreneur John D. Rockefeller, who drove most competitors from the field. It also came about because of technological advances that enabled a handful of large firms to satisfy the demand in many markets.
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The result was not complete monopoly but, rather, an economic order known as oligopoly, in which production is dominated by a few firms. The thrust toward bigness and monopoly power in key parts of the market (or capitalistic) economy has continued into the 20 th century. The reaction to this trend has been different in Europe and in the U. S. In Europe, the tendency has been either to nationalize key industries where competition did not work well, or else to allow big firms to make production and pricing agreements among themselves-that is, to form a cartel-under the watchful eye of the state. From the late 19 th century onward, the U.
S. has attempted to curb monopolies. The government first sought through antitrust laws to prevent the outright emergence of private monopolies in major industries by using law and the courts to impose competitive conditions on firms in these industries. The American practice in the case of many so-called natural monopolies-especially in the production and distribution of power, in public transportation, and in communications-has been to allow private ownership but to control the rates charged and the extent of services through regulatory agencies such as the Interstate Commerce Commission, the Federal Communications Commission, and the Federal Power Commission. No modern, non-Communist industrial society has adequately solved the dual problem of keeping the economy competitive or controlling monopoly in the public interest when it is simply more efficient to have one firm rather than many in a particular industry. THEORY OF MONOPOLY Economists have developed a complicated body of theory to explain why the behavior of a monopoly firm differs significantly from that of a competitive firm.
A monopoly company, like any other business, confronts two forces: (1) A set of demand conditions for the commodity or service it produces. (2) A set of cost conditions that governs how much it has to pay to those who supply the resources and labor required to produce its product. Every business firm must adjust its production to the point at which it is able to maximize its profit-that is, the difference between the revenue it receives from its sales and the costs it incurs in producing the amount sold. The level of production at which it achieves its maximum profit is not necessarily the one at which the firm is getting the highest possible price for its product. The major difference between a monopoly firm and one in a competitive industry is that the monopoly will have greater control over the price it charges for its product, although this control is never absolute.
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The monopoly firm thus has more freedom than the competitive firm to adjust price as well as production as it strives to achieve a maximum profit. From the viewpoint of society, monopoly leads to effects that are less desirable than those resulting from economic competition. In general, monopoly results in a smaller output of goods or services as compared with competition, and also in prices that are often higher than those in competitive industries. Another practice associated with monopoly is price discrimination, which involves charging a different price for the same goods or services to different segments of the same market. KINDS OF MONOPOLIES Among the various kinds of economic monopolies are public utilities, trusts, cartels, and industrial mergers. (1) Public Utilities: Pure monopolies – only a single firm in an industry – are rare in the U.
S. economy, except among the public utilities. These industries produce goods and provide services vital to the public well-being, including such essentials as water, power, transport, and communications. Although such monopolies often seem to be the most effective way to supply vital public services, they must be regulated when privately owned or else be owned and operated by a public body. Within the U.
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S. , the pattern varies widely. Aside from the U. S. Postal Service and some ventures into power production (such as the Tennessee Valley Authority), little public ownership occurs at the federal level. At the municipal level, however, public ownership of water-supply systems, electrical power facilities, and transportation companies is commonplace.
In most other nations, including those of Western Europe, public utilities are nearly always nationally owned. (2) Trusts: American history is replete with attempts by producers either to organize or to engage in practices that give them, in effect, monopoly power, although competition may still appear to exist. One of the earliest means used by producers to create an effective monopoly while retaining some semblance of competition was the trust. This is a device by which the real control of a company is transferred to an individual or small group by an exchange of shares of stock for trust certificates, which are issued by the individuals seeking control.
The widespread abuse of this technique after the American Civil War eventually led to passage of the Sherman Antitrust Act (1890), a law designed to make illegal all trusts and other combinations that aimed to create monopolies in restraint of interstate commerce. A similar device is the holding company, which issues its own stock shares for sale to the public and “holds” or controls other companies by owning their shares. Such an arrangement is not necessarily illegal, unless created specifically to monopolize commerce in interstate trade. (3) Cartels: Today perhaps the best known form of combination is the cartel because of the widespread attention given to the activities of the Organization of Petroleum Exporting Countries or OPEC. A cartel is an organization formed by producers whose purpose is to allocate market shares, control production, and regulate prices. OPEC does all these things, but its most highly publicized acts have been to set the world price for petroleum.
Cartels are illegal in the States. Most other countries, however-including the United Kingdom and the nations of Western Europe-have taken a more lenient view of cartels, allowing them to exist as long as their monopolistic practices do not become too outrageous. (4) Mergers: Efforts to organize an industry in order to achieve practical monopoly control take different forms. Any combination of firms that reduces competition may be of a vertical, horizontal, or conglomerate character. A vertical combination involves merging firms at different stages of the production process into a single unit. Some of the oil companies, for example, own oil fields, refineries, transportation systems, and retail outlets.
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A horizontal combination involves bringing together firms in the same industry and at the same level in the production chain. Recently, conglomerate-type mergers have become prominent, with spectacular success in the 1960 s but diminishing until 1984 and 1985, when the U. S. saw the greatest increase in corporate acquisitions in its history.
A conglomerate merger combines firms from several unrelated industries into a single organization. All mergers and combinations have the potential for eliminating competition and creating monopoly. Mere potential, however, is not illegal in the U. S. under existing laws.
GOVERNMENT REGULATION The Sherman Antitrust Act was the key legislation in the U. S. effort to maintain by legal means a competitive economic environment. This act, which outlawed any “combination or conspiracy in restraint of trade,” has been supplemented by additional legislation, aimed at specific practices that lessen competition.
In 1914 the U. S. Congress passed the Clayton Antitrust Act and also established the Federal Trade Commission. The Clayton Antitrust Act made illegal such practices as price discrimination and tying contracts, which forced a buyer or seller to deal exclusively with a particular firm. More recently, the Seller-Kefauver Act (1950) attempts to prevent mergers through the acquisition of the assets of competing firms if the effect is to substantially lessen competition.
Results of the U. S. effort to contain monopolies and maintain competition by legal means have been mixed. They have depended on the attitude of federal courts toward the meaning of monopoly power and on the vigor with which administrations in power are willing to enforce antitrust laws. Both have varied widely over time. In general, U.
S. efforts have been more successful in preventing the emergence of outright monopolies in many parts of the economy than in creating highly competitive markets in most industries. Outside the U. S. -and especially in the United Kingdom and Western Europe-no comparable effort has been made to use government power to enforce competition and prevent the emergence of monopoly in industry. Historically, these nations have taken a more tolerant view of the legality of monopolistic arrangements and practices.
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Recently, however, some antitrust statutes have been enacted in the European Union nations.