Monopoly

Monopoly

INTRODUCTION

Monopoly is an economic situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price.

One or more of the following elements are of great importance in establishing a monopoly in a particular industry:

(1) Control of a major resource necessary to produce a product, as was the case with bauxite in the pre-World War II aluminum industry.

(2) Technological capabilities that allow a single firm to produce at reasonable prices all the output of a particular commodity or service, a situation sometimes described as a “natural” monopoly;

(3) Exclusive control over a patent on a product or on the processes used to produce the product.

(4) A Government franchise that awards a company the sole right to produce a commodity or service in a given area.

HISTORICAL BACKGROUND

Economic monopolies have existed throughout much of human history. In ancient and medieval times dire scarcity of resources was common and affected the lives of most human beings. When resources are extremely scarce, little room exists for a multiplicity of producers for many products and services. The medieval guilds, for example, were associations of merchants or artisans that controlled output, set terms for entering a trade, and regulated prices and wages.

As nation-states began to emerge in the late Renaissance era, monopoly proved to be a useful device for sovereigns, ever strapped for the cash necessary to sustain their armies, courts, and extravagant life-styles. Monopoly rights were awarded to court favorites for manufacture and trade in basic essentials such as salt and tobacco. In all such charters, the sovereign received an ample share of the profits. Most major European nations also granted monopoly powers to private trading companies to stimulate exploration and the discovery of new lands. The awarding of monopoly power by the sovereign to private companies and court favorites, however, led to many abuses. In England, Parliament finally passed a Statute of Monopolies (1624) that sharply curtailed the monarch's right to create private monopolies in domestic trade. This act did not apply to the monopoly powers g...

... middle of paper ...

...ch forced a buyer or seller to deal exclusively with a particular firm. More recently, the Celler-Kefauver Act (1950) attempts to prevent mergers through the acquisition of the assets of competing firms if the effect is to substantially lessen competition.

Results of the U.S. effort to contain monopolies and maintain competition by legal means have been mixed. They have depended on the attitude of federal courts toward the meaning of monopoly power and on the vigor with which administrations in power are willing to enforce antitrust laws. Both have varied widely over time. In general, U.S. efforts have been more successful in preventing the emergence of outright monopolies in many parts of the economy than in creating highly competitive markets in most industries.

Outside the U.S.—and especially in the United Kingdom and Western Europe—no comparable effort has been made to use government power to enforce competition and prevent the emergence of monopoly in industry. Historically, these nations have taken a more tolerant view of the legality of monopolistic arrangements and practices. Recently, however, some antitrust statutes have been enacted in the European Union nations.