We explain what a monopoly is and what its causes and consequences are. In addition, its characteristics and how to combat it.
What is the Monopoly?
In economics , a monopoly is called the lack of commercial competition in a specific sector , item or economic activity, which allows a single person or company to have almost full control of the product or service.
This control that monopolies confer on a company or a person, allows them to define the conditions in which their eventual competitors could start in this area , either through the control of the prices of the traded goods or of the quantity of production offered by the same.
This represents an enormous advantage and privilege that contradicts the principles of healthy commercial competition and therefore often detracts from the overall quality of the system.
By not having a possible competition, the company or the person can freely define their commercial conditions and, for example, neglect the quality of the product or service offered, since consumers have no other option.
Monopolies are usually prohibited or limited by numerous economic laws of democratic countries , as they violate the right to free choice of consumers.
Definition of Monopoly
A pure monopoly occurs when there is a single and exclusive seller.
The term ‘monopoly’ comes from the union of the Greek words ‘monos’ (one, unique) and polein (to sell) , and usually designates a situation of market failure or legal advantage that privileges the most powerful sectors of a market by granting them complete control of the economic sector in which they operate. It is also often referred to as a ‘pure monopoly’ when there is a single and exclusive seller in the given market.
For a monopoly to exist, certain conditions must be met in a given market, namely:
- That there is a single producer or marketer ( pure monopoly ).
- That there are no economic substitute goods, that is, consumers cannot choose another similar product or service.
- That there are barriers that prevent eventual competitors from entering the market.
- That there is control over the essential goods for the commercialization of the product or provision of the service by a single instance.
- That the monopolist possesses essential specialized information.
In an oligopoly, a group of people or companies control a market.
A concept similar to that of monopoly is that of oligopoly, in which there is no longer one, but a set of companies or people that fully control a specific market , competing with each other but preventing the expansion of competition and enjoying the unfair advantage of their privileged situation.
Monopolists, that is, those who exercise a monopoly, will enjoy an enormous capacity to interfere in the market they control , being able to establish one of two possible strategies: fix the price or fix the production. But never both at the same time.
- Set the price. The monopolist determines the price of the unique product or service offered, selling only what the market can absorb, that is, what the people require.
- Fix production. The monopolist, on the contrary, fixes the quantity of goods offered, but refuses to fix the price, which will be fixed by the law of supply and demand .
In both cases, however, the absence of substitutes guarantees sustained profit and allows it to be managed unfairly around blocking the arrival of eventual competitors.
It is possible to block the competition by setting very low prices.
The blocking of eventual competitors can occur by the monopolist through unfair competition , for example, setting prices so low that they prevent competition from emerging; or it can also occur through the control of indispensable means of production, such as a television station that also bids the State the radioelectric signals available so as not to allow competitors to emerge; or through essential specialized information, such as the secret formula for making a product, without which it is impossible to compete in the same range.
Causes of monopoly
The causes of monopoly, according to economic theory, are:
- The ownership of a strategic tangible or intangible resource. As key raw material or essential and secret information regarding production, or proximity of some kind to an indispensable primary supplier.
- The right or license of the State for the exploitation of natural resources. This is the case of state tenders, which, devoid of antitrust laws, can lead to corruption and patronage .
- Exclusive franchisee of production in one area. Some companies have the legal permission for the exclusive production of a good, either by a State or a foreign consortium that supplies the materials only to them.
Consequences of the monopoly
The consequences of the monopoly can be summarized as:
- The consumer loses and the seller wins. Since the latter has all the control, the profit and no risk, especially in the case of essential goods for life ( electricity , drinking water , etc.).
- The price of the good tends to increase. Which is to the detriment of consumers, of course, and therefore of society as a whole.
- Weakening of the sector’s economy. Since there can be no competition, monopolies often “suffocate” the industry and impoverish it, rather than make it flourish.
- Enrichment of few. Monopolies in some cases are related to corruption, patronage, and other illegal or paralegal forms of economic association, which go to the detriment of the local economy.
Types of monopoly
In an artificial monopoly, the monopolist prevents the emergence of competitors.
The following types of monopoly can be named:
- Pure. When there is a single production or marketing company, there are no substitute products and there is no government intervention of any kind.
- Artificial. Those in which the monopolist prevents the emergence of competitors, generally through legal mechanisms of franchisee or exclusive bidding, often by the State, as in the case of marque or copyright.
- Natural. Those in which the control of the item by a single company lowers consumer prices even below the level at which several competing companies would. They are called socially efficient monopolies.
Ways to combat monopoly
Monopoly can be fought through antitrust laws.
Given that monopoly is considered an inefficient form of market that has a high social cost, many laws try to prevent its establishment, in the following ways:
- Prohibition. Prohibition through antitrust laws and state investigation mechanisms to sanction or even imprison monopolists.
- Regulation. In some cases, where the monopoly turns out to be the most convenient situation for a specific company, its existence can be accepted under the figure of a ‘natural’ monopoly, but limiting the market power of the monopolist through taxes, controls and social responsibility laws .
- Promotion. The promulgation and promotion of ‘artificial’ monopolies induced by the State can occur in specific cases of government economic policy, such as in cases of expropriations and nationalizations of companies, whose monopoly passes into the hands of the State.
Monopoly legal trend
There are generally two legal positions vis-à-vis monopolies, one that ensures state interventionism and the other that trusts the markets.
- Interventionism. It is common in social or socialist (or communist) regimes and relies on the participation of the State as the regulatory and supervisory entity of the economic activities of a country. This means that the only acceptable monopolies are those administered by the State, and that they do not detract from the quality of consumption.
- The liberalism . The opposite position assumes that the dynamics of the markets make monopolies unsustainable in the long term, except in the case of those that benefit the economy by making the industry cheaper. Precisely for this reason, they prefer that there are no artificial monopolies supported by the State, since they are a source of corruption and institutionalized inequality.
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