Definition and example of a monopoly

A monopoly is a company that has “monopoly power” in the market for a particular or service. This means that it has so much power in the market that it is effectively impossible to enter the market for any competitive businesses.

The existence of a monopoly depends on the nature of its business. This is often one that displays one or several of the following properties:

• There is a need to work under large economies of the scale
• Massive capital is required
• Provides a product without any option
• The government indicates the mandate to ensure its only existence
• May be – but does not always happen – technical superiority and control control resources

Examples in america

The most famous monopoly was standard oil company. John d. Rockfeller owned almost all oil refineries, which were in Ohio in the 1890s. His monopoly allowed him to control the price of oil. He threatened the railway companies to recover a low price for transportation. When Ohio threatened legal action to get her out of business, he went to New Jersey.

In 1998, the US district court ruled that Microsoft was an illegal monopoly. It was a controlled position as an operating system for individual computers and was used to intimidate a supplier, Chipmaker Intel. This forced computer manufacturers to withdraw better techniques. The government ordered Microsoft to share information about its operating system, allowing contestants to develop innovative products using the Windows platform.

But disruptive technologies have done more to eliminate the monopoly of Microsoft than government action. People are switching on mobile devices, such as tablets and smartphones, and Microsoft’s operating system for those devices is not popular in the market.

Some people would argue that Google has a monopoly on the Internet search engine market; People use it for about 90% of all discoveries.

How to work monopoly

Some companies become monopoly vertical integrationThey control the entire supply chain from production to retail. Other horizontal integrations; They buy contestants until they are left only.

Once the contestants are neutralized and monopoly is established, monopoly can increase prices as much as it wants. If a new competitive tries to enter the market, monopoly may reduce prices as the contestants need to squeeze. Any damage can be resumed with high prices. Once the contestants are squeezed.

American law on monopoly

The Sharman Anti-Trust Act was the first American law designed to prevent monopoly from using its power to get unfair advantage. The Congress implemented it in 1890 when monopoly was known as “trusts”, or groups of companies that would work together to fix prices. The Supreme Court later ruled that companies could work together to restrict business without violating the Sharman Act, but they could not do so to a “unfair” limit.

A few 24 years after the Sharman Act, the US passed two more laws related to the monopoly, the Federal Trade Commission Act and the Clayton Act. The Federal Trade Commission (FTC) was established by the former, while the latter specifically underlined some practices, which were not addressed by the Sharman Act.

When monopoly requires

Sometimes monopoly is necessary. Some, like utilities, enjoy government rules that provide them a market. Governments do this to protect the consumer. A monopoly ensures consistent power generation and distribution because there are no general disruption from free-market forces like contestants.

There may also be a high-up-front cost that makes it difficult for new businesses to compete. It is very expensive to build new electric plants or dams, so it makes an economic understanding that monopoly allows to control prices to pay for these costs.

Federal and local governments regulate these industries to protect the consumer. Companies are allowed to determine prices to resume their cost and a proper profit.

Criticism of monopoly

The monopoly prohibits free trade and prevents the free market from determining prices. It produces the following four adverse effects.

price fixing

Since monopoly is the only provider, they can determine any price they choose. This is called price-fixing. They can do this regardless of demand because they know that consumers have no option. This is especially true when there is Unqualified demand For goods and services. When people do not have much flexibility about the price on which they will buy products. Gasoline is an example – if you need to drive a car, you probably cannot wait until you like the price of gas to fill your tank.

Product quality decline

Not only can monopo prices raise prices, but they can also do supply Under product. If a grocery store knows that poor residents in the neighborhood have some options, the store may be less worried about quality.

Loss of innovation

The monopoly loses any incentive to new and improve “new and better” products. A study by the National Bureau of Economic Research found that American businesses have invested less than expected since 2000 due to a decline in competition. This was true about cable companies until satellite cuisine and online streaming services disrupted their grip on the market.

inflation

Monopoly produces inflation. Since they can determine any price at their wish, they will increase the cost to increase the profit for consumers. It is called Cost to inflationA good example of how it works Organization of the Petroleum Exporting Countries (OPEC). OPEC has 12 oil-export countries about 80% of the world’s proven oil reserves, and they have considerable power to increase or reduce oil prices.