Monopoly

Definition:

The word “monopoly” is derived from the Greek words monos (single) and polein (to sell). In economic terms, it is used to refer to a specific company or individual has a large enough control of a particular product or service that allows them to influence it’s price or certain characteristics.

Henry Ford, founder of Ford Motors had the following to say regarding his products: “Any customer can have a car painted any color that he wants so long as it is black.” Ford Motors held a monopoly in the automobile market, as they were the only automobile company that consumers can purchase from in the early 1900s.

What it takes to be a Monopoly

Monopolies exist when there is a lack of competition to produce a good or service, as well a lack of an alternative solution for the consumer.

A Monopoly must satisfy the following criteria:

  • Single seller: There can only be one seller, which is responsible for producing 100% of total output of the given product.
  • Market power: A company that holds a monopoly has the ability to change the price of the product whenever they feel is necessary. The absence of competition forces consumers to accept the new price since there is no alternative.
  • Firm and industry: A company that retains a monopoly is considered to be itself the industry. This means that the firm constitutes and represents the characteristics of the industry. Think of it this way: Total demand for the monopolistic company’s products equals the total demand for the entire industry.

Sources

In theory, holding a monopoly sounds lucrative, profitable and a source of power.

In fact, it is extremely difficult to achieve monopolistic status, or to compete with a monopoly.

There are circumstances that impede or greatly prevent a company from achieving a monopoly. Here are Several examples of barriers for a new company to enter and steal market share from the monopolistic comapny:

  • Capital requirements: Extremely large up front fixed costs often make it difficult for a new firm to enter the market and challenge the dominance of the monopoly.
  • Technological superiority: A monopoly that has existed for a long time has the resources, personnel and knowledge to make use of the most up-to-date and efficient technology. Having this superiority allows the monopoly to produce products at a cheaper price and more efficiently than a small firm would be able to.
  • Legal barriers: A government may operate a monopoly (such as electricity) and thus make it illegal for other companies.
  • Control of Natural Resources: controls resources that are vital to the production of the final good.

Example of a Monopoly (and its failure)

You might remember Microsoft was under the international microscope for operating as a monopoly in 1998.

The logic behind this argument was that the Microsoft web browser was pre-loaded on all Windows operated computers for free.

Competing web browsers such as Netscape (remember them?) and Opera would take a long time to download at dial-up speeds. These browsers were also available for purchase in a store for a high price.

These two aspects made it unrealistic for a consumer to use a browser other then Microsoft.

Regardless, a United State Judge concluded that Microsoft is indeed a monopoly. With the support of 240 economists, Microsoft had made the following argument which appeared in major newspapers as their defense: “Consumers did not ask for these antitrust actions — rival business firms did. Consumers of high technology have enjoyed falling prices, expanding outputs, and a breathtaking array of new products and innovations.”

Today, Microsoft has been overtaken by Apple in terms of market size and innovation.

This goes to show that monopolies cannot last forever, and it is possible for a much smaller company to challenge monopolies and steal market share.

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