The term monopoly refers to a situation in which a single person or organization is the only supplier of a particular commodity or service. In order for a monopoly to exist, there must be a lack of competition in the production of the good or offering of the service, as well as a lack of legitimate alternatives to the product or service. Essentially, a person or business holding a monopoly becomes “the only game in town.” To explore this concept, consider the following monopoly definition.
Definition of Monopoly
- The exclusive control over a commodity or service in a specific market, or the kind of control that allows for manipulating prices.
- A company or organization that holds this kind of control.
- A market condition wherein only one seller is present.
1525-1535 Latin monopolium
What is a Monopoly
The verb version of “monopoly” is “monopolize,” which defines an individual’s or company’s ability to raise prices, and/or to exclude any and all competitors. When discussing economics, a monopoly is a business entity that has the power to charge ridiculously high prices because it’s the only business offering the product or service – people have no choice but to buy from it. Many believe that monopolies are synonymous with larger companies, but small companies can actually be monopolies too – they just need to be able to charge, and receive, higher prices in smaller markets.
A monopoly is different from a monopsony, which refers to a market in which there is just one buyer of a product or service, making it impossible for others to obtain it. A monopoly becomes powerful when circumstances exist that either prevent, or severely obstruct, a potential competitor’s ability to function in the same market. These circumstances are known as “barriers to entry.”
Although steps have been taken in many countries to prevent monopolies from forming, they still have a foothold in many situations. The following are examples of monopoly markets that existed in the past, and two examples that are still going strong to this day.
Standard Oil was created by John D. Rockefeller in 1882, and by 1890, Standard Oil controlled 88 percent of all refined oil production, refinement, transportation, and marking in the U.S. The company’s control of oil production rose to 91 percent by the turn of the century, as it engaged in what were later deemed unfair business practices to prevent other companies from entering the oil market. In 1909, Standard Oil’s reign and domination began to tumble down. The U.S. Department of Justice sued Standard Oil for its monopoly, citing both discriminatory and unfair practices as two of the sources of its power.
De Beers has control over most of the diamond mines in South Africa, Namibia, and Botswana, and it purchases and stockpiles its supply of rough diamonds so that it can charge very high prices as the primary supplier of diamonds in the industry. De Beers ships a large portion of its rough diamond supply to London, where they are graded, catalogued, and sorted.
The company used this practice to enforce the world’s belief that diamonds are scarce, though that’s only true because De Beers has already scooped them all up and shipped them out. De Beers once enjoyed a 90 percent market share back in the 1980s, but this number plummeted to less than 50 percent after they were sued for, and pled guilty to, price-fixing of industrial diamonds back in 2004.
American Telephone and Telegraph
American Telephone and Telegraph, or AT&T, earned its nickname of “Ma Bell” when it bought up all of its competitors in the early 1900s. The government actually enforced AT&T’s monopoly in 1918 when it nationalized the telecommunications industry.
The government gave the contract to AT&T without a second thought, as the government had already determined that competitors would not be permitted to install new lines that would make AT&T’s lines redundant and unnecessary. “Ma Bell” was eventually split up into seven “Baby Bells,” however, as new technologies continued to come on the scene that made AT&T’s older systems obsolete, like fiber optics and cell phones.
Luxottica, which owns 80 percent of the major eyewear brands worldwide, is a household item, if not a household name. As everyone who has purchased a set of glasses, from budget brands such as those sold at Sears Optical, to the luxury brands like Coash, and others sold at a wide variety of retail outlets, make this company a prime example of monopoly. In fact, their products appear, by different brand names, in more than 7,000 retail locations across the globe.
An interesting question posed by 60 Minutes in a segment they did in 2012 is: why is there such a difference in prices among glasses that are manufactured by the same company? Do they use their effective monopoly in order to command higher prices for so-called luxury brands?
Monsanto has come a long way since its inception in 1901, when John Francis Queeny started the company with money from his own pocket. Since then, Monsanto has become a global empire in the food industry, having built its reputation on: a) the promotion of genetically modified foods, and b) being merciless toward anyone who has the gall to use their genetically modified foods without paying them for them.
For instance, the company has developed “Terminator” seeds, which worked to sterilize farmers’ plants so that they would be incapable of producing seeds in the future. This way, the farmers have to buy more seeds each year, rather than re-planting from their own crops. The company hasn’t stopped there. Monsanto has actually prosecuted farmers for using Monsanto seeds that they obtained from neighboring farms. Nearly 80 percent of America’s corn is produced from Monsanto seeds.
Difference between a Monopoly and a Dictatorship
While monopolies and dictatorships both seem to concern one person or entity having control over an entire market or people, therein lies the difference: a monopoly concerns itself more with business matters, rather than with matters of the government, and a dictatorship is a type of government wherein one person or entity rules over several different countries.
Another difference between a monopoly and a dictatorship is that, while no competition exists in a monopoly (often because the main company forced them out on the way to the top) a dictatorship rules with an authoritarian fist. A dictatorship often uses propaganda in order to decrease the appeal of any of the alternative governmental systems that could give it fair competition. In many cases, however, dictators have enforced their reign with force, coercion, and violence.
When a monopoly falls, smaller companies have the opportunity to swoop in and vie for the business they previously were unable to succeed in. Decision made by a dictator may be felt for decades, and across generations. When a dictatorship falls, it can leave the entire country in ruin. Monopolies control others by taking what they believe is rightly theirs from everyone else, thereby forcing them out of the competition entirely. Dictatorships control others by indirectly denying them what is rightfully theirs.
Monopoly and the Sherman Antitrust Act
When companies engage in unfair practices to become top-dog in the industry, it is easy to imagine that some of them could end up in court over it. The issue of monopolizing a market was tackled by the U.S. Supreme Court in the “Sugar Trust Case” of 1895. In a nutshell, the Sugar Trust Case ultimately limited the government’s power to control monopolies.
In 1892, the E.C. Knight Company, as well as several other sugar refining companies, came under the control of the American Sugar Refining Company. As a result, American Sugar had a 98 percent monopoly over the nation’s sugar refining market. President Grover Cleveland deemed sugar to be a necessity of life in America, and instructed the national government to sue the Knight Company under the Sherman Antitrust Act in order to stop the acquisition from happening. The Court ruled against the government, holding that, while the Constitution gives Congress the authority to regulate interstate commerce, manufacturing and refining do not fall under that definition.
Because manufacturing and refining are activities that take place in a single place, or manufactory, not across state lines, these activities are under the authority of each individual state. Going forward, any action made against manufacturing monopolies would need to be taken by states individually, as opposed to escalating the case to the federal level.
This worked to make out-of-state monopoly regulation more difficult because states are prohibited from discriminating against out-of-state goods. This ruling was the law of the land until the late 1930s, which was when the Court decided to take a different position on the lengths to which the national government could go to regulate the economy.
Related Legal Terms and Issues
- Interstate Commerce – The sale, purchase, or exchange of commodities; transportation of people, money, or goods; and navigation of waters between states.
- Price Fixing – An illegal agreement between parties to buy or sell a product at a fixed price, thus controlling market conditions by controlling supply and demand.
- Sherman Antitrust Act – A federal law that prohibits monopolies.