Monopolies
A monopoly is a market structure in which a single company or corporation holds significant control over a market, often stifling competition. This dominance allows the monopolistic entity to set prices and dictate market conditions, making it challenging for other businesses to compete or enter the market. Historically, notable examples of monopolies include Standard Oil, which once controlled a vast majority of the oil market in the United States, leading to its breakup under the Sherman Antitrust Act. This legislation aims to prevent monopolistic practices and promote competition, which is considered essential in a capitalist economy for fostering innovation, lowering prices, and improving customer service.
Monopolies can arise through various tactics, such as mergers, buyouts, and anti-competitive strategies designed to eliminate rivals. However, there are distinctions between monopolies and oligopolies, the latter being a market structure where a few companies collude to maintain prices rather than a single company dominating the market. Modern concerns about monopolistic behavior continue to persist, with companies like Microsoft and Intel having faced scrutiny and legal action for their market practices. Recent antitrust lawsuits against major corporations like Facebook and Apple highlight ongoing challenges related to market concentration in sectors such as technology and social media. Understanding monopolies is crucial for evaluating their impact on economic health and consumer choice.
On this Page
Monopolies
A monopoly occurs when a company controls such a large share of a market that it can arbitrarily decide prices and easily snuff out competition. Monopolies have a long history in the United States. Standard Oil Co. Inc. is one such monopoly that controlled virtually its entire market and made huge profits from doing so. Such a practice became illegal under the Sherman Antitrust Act. Despite this, many believe some modern companies (such as Microsoft and Intel) engage in monopolistic behavior without being properly penalized.
Overview
A monopoly is any business or corporation that controls enough of a market to severely discourage competition. This removal of competition can be achieved through various means. Historically, businesses have used tactics such as buyouts and mergers to absorb competition. Temporarily reducing prices to operate at a loss for a short time to drive smaller competitors out of business is also common. If the marketable resource is new or scarce, a monopolistic business may simply control all or almost all the resources, as was the case with Standard Oil, which controlled nearly the entire market. Monopolies also make it as difficult as possible for new businesses to enter their market, either by persuading lobbyists to shape laws in their favor or using their power in the industry to crush competition before it has a chance to grow.
Not all price-fixing or anticompetitive behavior constitutes a monopoly. An oligopoly is an arrangement between major companies in a given market to not compete as they should to keep prices for a product within a given range. Together, the companies might agree to stay out of certain districts so that they do not have to compete, voluntarily split up industries, move prices up or down together to drive out other competition, or even conspire to keep their products similar so consumers will be split evenly between them. However, as this is not one company using its market share to reduce competition, it fails to qualify as a monopoly.
The problem with monopolies is not their market share but the fact that they stifle competition. For the business holding the monopoly, this is a wonderful thing. It can set prices to make a great profit without any worry of being undercut. It can retain its market share regardless of product quality because there are no alternatives in the market. However, a society run by capitalism needs competition to properly function.
Competition in a capitalist society is good for the consumer. If businesses constantly try to get an edge over one another, they will create new and better products, find ways to keep prices low, and treat their customers well. A business in a competitive market must do all this—if it does not, another business will and its customers will leave for a competitor.
Without competition, a business has no motivation to do anything but maximize its own profits. Prices rise, customer service spirals downward, and innovation is stifled unless it makes a profit for the monopoly holder.
The problem is that in a free market, the goal of every business is to out-perform enough of its competition to become the sole remaining service provider. This is where antitrust legislation comes into play. The Sherman Antitrust Act was created in the 1920s specifically to break up Standard Oil Co. Inc., which had completely eliminated or absorbed all competitors. The government used this act to legally force Standard Oil to break up into various smaller companies, which would then have to compete with each other for market share. It also made the formation of similar monopolies illegal and made any mergers that might cause them subject to review by the government.
The Sherman Antitrust Act has been used many times since then, including recently on Microsoft Corporation, which had come to dominate more than 90 percent of the personal computer market, and on AT&T in the 1980s. While the penalties proposed on Microsoft did little to reduce its market share, they did produce innovation and competition. Microsoft's web browser, Internet Explorer, now has major successful competitors, and Microsoft has not pursued anti-competitive business practices since. The breakup of AT&T into various smaller companies was extremely successful.
The microchip company Advanced Micro Devices (AMD) filed an anti-monopoly suit against Intel, which dominated the market. AMD claimed that when it introduced a chipset more advanced and efficient than the ones Intel was producing, Intel began to design its products specifically to cause problems with AMD chips and placed the blame on AMD. Additionally, AMD claimed that Intel used its 80-percent market share to force buyers to boycott AMD chips, rewarding them with heavy discounts if they complied and threatening to cease selling them Intel chips if they did not. AMD, a smaller company and Intel's closest competitor, did not have the capacity to produce enough chips to fill any void that would be left if Intel pulled its supply from major retailers. Knowing this, retailers would have to accept the discount with Intel and cease to use AMD chips or be left without necessary computer parts. The suit was settled outside of court with Intel paying AMD $1.25 billion and promising not to engage in any anti-competitive behavior in the future. The US Federal Trade Commission (FTC) brought another lawsuit against Intel for its practices against AMD and similar practices against another company. While Intel admitted no wrongdoing, the company agreed to an enormous out-of-court settlement.
In the 2010s and 2020s, several industries faced issues with monopolization to the extent that economists described the period as a second Gilded Age. These issues were most obvious in the US entertainment, medicine, and technology sectors. Likewise, just a handful of companies controlled large shares of the US agriculture, beer, and hardware industries, respectively, resulting in small farms, brewing companies, and other businesses being squeezed out of markets, a decline in product quality, and an increase in income inequality. In 2020, the Federal Trade Commission sued Facebook for anticompetitive conduct that the FTC said allowed the company to maintain a monopoly among social network platforms. The FTC sued Apple in 2024 for monopolizing the smartphone market by limiting integration between its iPhones and rival companies' offerings.
Bibliography
Beattie, Andrew. "A History of U.S. Monopolies." Investopedia.com, IAC, 30 Apr. 2024, www.investopedia.com/articles/economics/08/hammer-antitrust.asp. Accessed 14 Nov. 2024.
Broughel, J. C. "Monopolies - A Growing Problem in Today's America?" Grey Journal, 2021, greyjournal.net/hustle/inspire/monopolies-a-growing-problem-in-todays-america/. Accessed 14 Nov. 2024.
Stoltz, Mitch. "The Year We Got Serious about Tech Monopolies: 2022 in Review." Electronic Frontier Foundation, 29 Dec. 2022, www.eff.org/deeplinks/2022/12/year-we-got-serious-about-tech-monopolies. Accessed 14 Nov. 2024.
Wu, Tim. "The Oligopoly Problem." The New Yorker, Lisa Hughes, 15 Apr. 2013, newyorker.com/tech/elements/the-oligopoly-problem. Accessed 14 Nov. 2024.