Monopoly

[[File:Monopoly - K. LCCN2011647531.jpg|300px|thumb|The monopolist as depicted by ''Puck'' magazine in 1909]]
{{economics}}
{{hatnote|If you were looking for the board game, you're on the wrong website. Try {{wpl|Monopoly (game)|Wikipedia|,}} [https://boardgamegeek.com/boardgame/1406/monopoly BoardGameGeek], or [https://1d6chan.miraheze.org/wiki/Monopoly 1d6chan].}}

A '''Monopoly''' is a state of market competition when there is only one supplier of a particular good or service. 

==Theory==
A monopoly exists when there is only one company or entity supplying some product on the market.<ref>[https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-monopoly/ Introduction to Monopoly]</ref><ref group=note>In the [[real world]] there are rarely any instances where one firm actually controls 100% of anything, so monopolies may not literally monopolize something, but by virtue of controlling an enormous share of the market are still deemed problematic.</ref> Economists view monopolies as inefficient because they face no competition, and can thus charge higher prices (PM) than the market rate otherwise might be (PC). They also tend to reduce output as well.<ref>Kenton, Will. "[https://www.investopedia.com/terms/m/monopoly.asp Monopoly]". ''Investopedia.'' Retrieved 2020-01-27.</ref><ref>Bain, Joe S. "[https://www.britannica.com/topic/monopoly-economics Monopoly and competition]". ''Encyclopedia Britannica''. Retrieved 2020-01-27.</ref> This creates a large amount of deadweight loss and enhances producer surplus at the expense of consumer surplus. Monopolies may not always be a bad thing. They can take advantage of economies of scale and keep prices low, at least for a while. The economist Joseph Schumpeter suggested monopolies could have advantages, such as the ability to conduct more research than other smaller firms do relative to their size. 

But what causes a monopoly? There are at least two answers for this question. The first is thesize of the '''minimum efficient scale''' (MES), the level of output that minimizes average cost, relative to the size of demand. In competitive markets, there is room for many firms, each charging, while in monopolistic markets, only one firm can make positive profits.	
<ref name=Varian>{{Cite book |last=Varian |first=Hal R. |url=https://www.worldcat.org/oclc/317920200 |title=Intermediate microeconomics : a modern approach |date=2010 |publisher=W.W. Norton & Co |isbn=978-0-393-93424-3 |edition=8th ed |location=New York |oclc=317920200}}</ref>{{rp|454}}

In other words, the shape of the average cost curve, dictated by the basic technology employed, is an important aspect in determining whether the market will function competitively or monopolistically. If the minimum efficient production scale – the level of production that minimizes average costs – is small relative to the size of the market, we can expect competitive conditions to prevail.<ref name=Varian>{{Cite book |last=Varian |first=Hal R. |url=https://www.worldcat.org/oclc/317920200 |title=Intermediate microeconomics : a modern approach |date=2010 |publisher=W.W. Norton & Co |isbn=978-0-393-93424-3 |edition=8th ed |location=New York |oclc=317920200}}</ref>{{rp|455}}

It is important to mention that this statement is relative: what matters is the relationship between scale and market size.There isn't much to do about the minimum scale of efficiency, as it is determined by technology. But economic policy can influence market size. If a country chooses a [[Free trade|non-restrictive foreign trade policy]], so that domestic companies face foreign competition, these companies will have much less ability to influence prices. On the contrary, if a country adopts a restrictive foreign trade policy, which limits the size of the market for that country, the occurrence of monopolistic practices will become more likely.<ref name=Varian>{{Cite book |last=Varian |first=Hal R. |url=https://www.worldcat.org/oclc/317920200 |title=Intermediate microeconomics : a modern approach |date=2010 |publisher=W.W. Norton & Co |isbn=978-0-393-93424-3 |edition=8th ed |location=New York |oclc=317920200}}</ref>{{rp|455}}

The second reason why monopolies might occur is when firms collude as {{wpl|cartels}}, restricting their output in order to raise prices and thereby increase their profits.<ref name=Varian>{{Cite book |last=Varian |first=Hal R. |url=https://www.worldcat.org/oclc/317920200 |title=Intermediate microeconomics : a modern approach |date=2010 |publisher=W.W. Norton & Co |isbn=978-0-393-93424-3 |edition=8th ed |location=New York |oclc=317920200}}</ref>{{rp|455}}

==Problems caused by monopolies==
===Ineffiency and deadweight losses===
[[File:Monopoly-surpluses.svg|left|185px|thumb|Monopolies cause deadweight losses.]]
While competitives companies operate at a point where price equals marginal cost, the monopolized firms operates where price is greater than marginal cost. As a result, in general, the price will be higher and the output lower when the firm behaves monopolistically rather than competitively. As a result, consumers will generally be worse off in an industry organized as a monopoly than in one organized competitively, since they won't pay the price for these goods and services.<ref name=Varian></ref>{{rp|445-447}} And why don't the monopolistic producers increase the production and/or lower the prices, so it can sell to these consumers? Because, to do so, it would have to lower the price to ''everyone'', which would end up lowering its profits instead.{{efn|Although some monopolies can discriminate prices, which we'll see next.}}

In other words, since a monopolist charges a price in excess of marginal cost, it will produce an inefficient amount of output. The size of the inefficiency can be measured by the deadweight loss {{--}} the net loss of consumers’ and the producer’s surplus.

===Political economy===
The amount of market power an unaccountable private firm may have coupled with the [[Lobbying|political influence]] it can gain is often deemed as something dangerous to [[Free market|free enterprise]] and [[democracy]].

==Examples==
Contrary to popular belief, firms with substantial monopoly power are rare, since few goods are actually unique and don't have similar substitutes.<ref name=Mankiw>{{Cite book |last=Mankiw |first=N. Gregory |url=https://www.worldcat.org/oclc/1109789332 |title=Principles of economics |date=2021 |isbn=978-0-357-03831-4 |edition=9th edition |location=Boston, MA |oclc=1109789332}}</ref>{{rp|312}} Globally, the [[De Beers]] Mining company is thought of as the closest thing to a genuine international monopoly that has ever existed.<ref>[https://www.economist.com/special-report/2004/07/15/the-cartel-isnt-for-ever The cartel isn't for ever]. ''The Economist''.</ref> From the 1940s to 1970s world [[oil]] was dominated by the "Seven Sisters" a small cartel of private oil producers.<ref>White, L. J. (1976). ''The Seven Sisters: The Great Oil Companies and the World They Shaped''.</ref> Since the mid-1970s OPEC has come to dominate world oil production and state-run energy enterprises have taken on a much greater burden of oil production. Despite coming close, and sometimes being referred to as monopolies, neither the Seven Sisters nor OPEC are true monopolies; rather, they are closer to [[Oligopoly|oligopolies]].

==Government response==
There are many answers to the monopoly problem. Unsurprisingly, all of them have advantages and shortcomings.

{{anchor|Antitrust}}
===Increasing competition with antitrust laws===
One of the most commons ways to fight monopolies is with antitrust laws, such as the Sherman Act, in the US. The antitrust laws give the government various ways to promote competition, such as preventing merges, allowing the government to break up a large company into a group of smaller ones and preventing companies from coordinating their activities in ways that make markets less competitive.

They do have, however, costs. Companies will often merge not to reduce competition but to lower costs through a more efficient joint production. For example, many U.S. banks have merged over the last few years, and by combining operations, have been able to reduce administrative expenses. If antitrust laws are to raise social welfare, the government must be able to determine which mergers are desirable and which are not. It is often hard for the government to perform the necessary cost–benefit analysis with sufficient accuracy.<ref name=Mankiw>{{Cite book |last=Mankiw |first=N. Gregory |url=https://www.worldcat.org/oclc/1109789332 |title=Principles of economics |date=2021 |isbn=978-0-357-03831-4 |edition=9th edition |location=Boston, MA |oclc=1109789332}}</ref>{{rp|308-09}}

===Regulation===
Governments can also deal with monopolies with regulations, especially with natural monopolies. One example of this regulation is when the government set prices for water and electric companies. Natural monopolies have declining average total cost. If the government sets a price equal to marginal cost, that price would be less than the firm’s average total cost and the firm would end up losing money. Instead of charging such a low price, the monopoly firm would just exit the industry. There are some ways to answer to this problem, but all of them also have problems. The government can subsidize the monopolistpicking up the losses inherent in marginal-cost pricing. Yet to pay for the subsidy, the government needs to raise money through taxation, which itself generates deadweight losses, the same problem that monopolies produce.<ref name=Mankiw>{{Cite book |last=Mankiw |first=N. Gregory |url=https://www.worldcat.org/oclc/1109789332 |title=Principles of economics |date=2021 |isbn=978-0-357-03831-4 |edition=9th edition |location=Boston, MA |oclc=1109789332}}</ref>{{rp|308}}

===Public ownership===
Another solution that the government uses to deal with monopoly is public ownership. In other words, rather than regulating a natural monopoly run by a private firm, the government can run the monopoly itself.
The problem of this solution is the fact that private owners have an incentive to minimize costs as long as they reap part of the benefit in the form of higher profit. If the firm’s managers do a bad job of keeping costs down, the firm’s owners will fire them. On the other hand, if the government bureaucrats who run a monopoly do a bad job, the losers are the customers and taxpayers, whose only recourse is the political system. The bureaucrats may become a special-interest group and attempt to block cost-reducing reforms. Put simply, as a way of ensuring that firms are well run, the voting booth is less reliable than the profit motive.<ref name=Mankiw>{{Cite book |last=Mankiw |first=N. Gregory |url=https://www.worldcat.org/oclc/1109789332 |title=Principles of economics |date=2021 |isbn=978-0-357-03831-4 |edition=9th edition |location=Boston, MA |oclc=1109789332}}</ref>{{rp|310}}

===Doing nothing===
Some economists argue that it is often best for the government not to try to remedy the inefficiencies of monopoly pricing, as the government will often makes things worse.<ref name=Mankiw>{{Cite book |last=Mankiw |first=N. Gregory |url=https://www.worldcat.org/oclc/1109789332 |title=Principles of economics |date=2021 |isbn=978-0-357-03831-4 |edition=9th edition |location=Boston, MA |oclc=1109789332}}</ref>{{rp|311}} 

According to Nobel Memorial Prize laureate George Stigler:<ref>{{Cite web |title=Monopoly, by George J. Stigler: The Concise Encyclopedia of Economics {{!}} Library of Economics and Liberty |url=https://www.econlib.org/library/Enc1/Monopoly.html |access-date=2023-02-07 |website=www.econlib.org}}</ref>
{{quotebox|A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called "market failure." In my view, however, the degree of "market failure" for the American economy is much smaller than the "political failure" arising from the imperfections of economic policies found in real political systems. The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.}}

==Natural monopoly==
[[File:Wacol Sewage Treatment Plant, Queensland 02.jpg|165px|thumb|right|Waste disposal tends to be a natural monopoly.]]
A natural monopoly is one that is considered unavoidable, or almost so. Often it can take advantage of economies of scale, supplying a large number of customers something as average costs decrease with each additional unit of output.<ref group=note>The initial fixed costs of building a water system for an entire city may be enormous, the cost of supplying to the entire population is much lower, as each gallon of water sold is spread out over a huge consumer base.</ref> Utilities (gas, [[water]], electric, sewage) are generally thought of as natural monopolies. Multiple competing sewage networks in the same dense urban environment is simply impractical. At the same time, because of the costs of building a sewage network and extending it to remote rural areas with small populations who wouldn't be able to reimburse the firm, utilities often end up being government-owned or heavily regulated in most communities. In some instances it may be ''more'' costly to have competition and so having one firm provide everything is seen as more natural.

==Government-granted monopoly==
Occasionally governments and societies want monopolies and will grant them to firms. One of the most common types of government granted monopolies are [[patent]]s - intellectual property that gives one firm the exclusive right to sell a certain type of product.<ref>Meiners, R. E., & Staaf, R. J. (1990). Patents, copyrights, and trademarks: property or monopoly. ''Harv. JL & Pub. Pol'y,'' 13, 911.</ref> [[Big Pharma| Pharmaceutical]] patents are a common example. Because the costs of producing a new drug are often very high, governments are typically willing to allow the company a period of exclusivity. While this does mean the [[drug]] will be more expensive, the patent serves as an incentive to encourage innovation. Controversially, pharmaceuticals companies often argue the need for strong patent laws, while consumers and some economists have suggested alternatives.<ref group=note>Potential alternatives include offering one-time cash rewards for major medical breakthroughs or increased government funding for basic research.</ref><ref>Qureshi, Zia (2018-07-11). "[https://www.brookings.edu/opinions/intellectual-property-not-intellectual-monopoly/ Intellectual property, not intellectual monopoly]". ''Brookings.'' Retrieved 2020-01-27.</ref> In [[communist]] countries like the [[Soviet Union]], virtually every enterprise was a [[Command economy|state-owned monopoly]].

As previously mentioned, utilities are often government monopolies.<ref>Auriol, E., & Picard, P. M. (2009). "[https://www.cesifo.org/DocDL/cesifo1_wp1733.pdf Government outsourcing: Public contracting with private monopoly.]" ''The Economic Journal'', 119(540), 1464-1493.</ref> Governments may use contracts with private firms to get them to achieve some socially-beneficial goal, like ensuring that even people in the remote outskirts of a city or town can still have water or electricity. By granting a power-company a monopoly on providing electricity or telephone service in a city, the government does give them a large amount of power. Via regulation or contract, however, the government will often manage prices to ensure the firm does not abuse its privileged position.

In the Age of Discovery, the kingdoms of Iberia ([[Spain]] and [[Portugal]]) set up trading monopolies for themselves, declaring that they had exclusive rights to exploit resources (precious metals and [[slavery|human resources]]) and to plunder in Asia, Africa, and the Americas.<ref>{{wpa|Treaty of Tordesillas}}</ref> This had the effect of encouraging French, Dutch, and English pirates/privateers, smugglers, and [[colonialism|colonists]] to disrupt the market<ref>{{wpa|Disruptive innovation}}</ref> in the interests of international fairness.

==See also==
*[[Perfect competition]]
*[[Oligopoly]]
*[[Microsoft]]: Accused of anti-competitive practices.

==Notes==
{{reflist|1|90%|group=note}}

==References==
{{reflist|2|90%}}

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