Monopoly

Business, Legal & Accounting Glossary

Definition: Monopoly


Monopoly

Quick Summary of Monopoly


A situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare.




What is the dictionary definition of Monopoly?

Dictionary Definition


n. a business or inter-related group of businesses which controls so much of the production or sale of a product or kind of product as to control the market, including prices and distribution. Business practices, combinations and/or acquisitions which tend to create a monopoly may violate various federal statutes which regulate or prohibit business trusts and monopolies or prohibit restraint of trade. However, limited monopolies granted by a manufacturer to a wholesaler in a particular area are usually legal, since they are like “licenses.” Public utilities such as electric, gas and water companies may also hold a monopoly in a particular geographic area since it is the only practical way to provide the public service, and they are regulated by state public utility commissions.


Full Definition of Monopoly


A monopoly is an economic condition in which a company, organization, or person has enough power over a certain product, service, or even industry, that they set the terms for others’ accessibility to that product or service.

A monopoly is defined as the complete control over a market by a particular firm or individual. Such control plays an important role in determining the conditions on which the goods are sold or by which consumers can have access to them. One of the salient features of a monopoly is that there is no economic competition. This results in a dearth of alternative options. A monopolistic economy that possesses the sanction of the state is known as a legal monopoly or government-granted monopoly.

Monopolies can be controlled by the government. The government regulators check the rise in the annual price and induce competition into such markets. There are firms that have established a monopoly in the domestic market but face constant competition from international manufacturers. According to the theory of contestable markets, competition may exist in monopolies. The “hit and run entry” of other competing firms may influence the price of their products and output thus introducing competition in a monopoly.

In China, legislation has been passed to make monopolies illegal.

Examples

An example of a monopoly is a national power company selling electricity and other utilities at its own non-competitive rate, with no other suppliers available in the market.

Standard Oil

One of the most notorious monopolies was the Standard Oil monopoly which created massive amounts of public distrust and anger. Standard Oil was a petroleum company started by the Rockefellers in 1870 in the US. At the time, the market was very fragmented with more than 250 other oil companies. To eliminate the competition, Standard Oil employed a variety of underhanded techniques. They included:

  • Undercutting the prices of competitors to force them out of business or to sell their companies to Standard Oil.
  • Purchasing all of the tools and materials required to manufacture oil barrels to block the competition from transporting their oil to customers.
  • Negotiating rebates with the railroads that transported the oil. It was able to leverage its massive (and increasing) volumes of oil shipment to do this. As a result, Standard Oil paid far less than the competition for shipping.
  • Secretly buying competitors and then having employees from those firms spy on and give advance warning of transactions being planned by other competitors.
  • Secretly purchasing up or forming new oil-related companies, like pipeline and engineering companies, that looked like independent operators but which gave Standard Oil hidden deals and rebates.
  • Using threats of physical violence against competitors.

Arguments Against Monopolies

It is often said that in a monopoly, unlike in a competitive market, the production output is low and the costs high. Such a situation results in inefficiency and little economic welfare. The producers attempt to make maximum profits thereby resulting in deadweight loss of consumer surplus.

Due to the lack of competition caused by monopolies, the companies engaged in monopolistic practices have no incentive to innovate. Monopolies stifle the development of new technologies, ideas, and the new product development process (NDPP).

Monopolies And Capitalism

Monopolies are often regarded as the highest example of capitalism. A significant number of economists believe that a monopoly is not a viable market scenario with the exception of a few situations. This is because a company that is ruling a particular market does not feel any need to improve its products and services as there is no competition. They have no urge to satisfy the demands of customers.

Patents

Patents can be regarded as a form of monopoly as patents provide holders with exclusive rights to a particular invention and any business transactions that may be done with it. A primary reason behind providing patents is to enable inventors to recover significant research and development expenses that have been incurred in that discovery.

Public Monopolies

Public monopolies are a type of monopoly. These are established by governments in order to furnish services that are extremely necessary. A few economists are of the opinion that essential services like water and electricity should be provided by utilities at affordable costs.


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Definition Sources


Definitions for Monopoly are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 21st November, 2021 | 0 Views.