Monopoly

A monopoly is an enterprise that is the only seller of a good or service.

Definitions

Despite the fact that monopoly problems occupy an enormous quantity of economic writings, little or no clarity of definition exists. There is, in fact, enormous vagueness and confusion on the subject.

"Monopoly exists when a firm has control over its price."

Firms never have control over their prices, because every exchange is a voluntary transaction subject to market forces. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price.

All producers have absolute control over the quantity they produce and the price which they attempt to get; and absolute noncontrol over the price-and-quantity transaction that finally takes place.

"The only seller of any given good."

It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a "monopolist. John Jones, lawyer, is a "monopolist" over the legal services of John Jones; Tom Williams, doctor, is a "monopolist" over his own unique medical services, etc. The owner of the Empire State Building is a "monopolist" over the rental services in his building. This definition, therefore, labels all consumer distinctions between individual products as establishing "monopolies.

Only consumers can determine what an individual good is. There is no way to determine this externally.

A monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group.

This definition of monopoly goes back to the common law and acquired great political importance in England during the sixteenth and seventeenth centuries, when an historic struggle took place between libertarians and the Crown over the issue of monopoly as opposed to freedom of production and enterprise. Under this definition of the term, it is not surprising that "monopoly" took on connotations of sinister interest and tyranny in the public mind. The enormous restrictions on production and trade, as well as the establishment by the State of a monopoly caste of favorites, were the objects of vehement attack for several centuries.

This type of monopoly can never arise on a free market, unhampered by State interference. In the free economy, then, according to this definition, there can be no "monopoly problem."

Natural monopoly

A "natural monopoly" or "public utility" occurs where "competition is not feasible." This concept has the following issues:

• There is no way to determine how many firms should be in a given industry. It could be true that only one is possible.
• It is also not possible to determine whether the firm is charging a monopoly price.
• There are no rational grounds to separate "public utilities" from other spheres on the market.

The history of the so-called public utility concept is that the late-nineteenth- and early-twentieth-century "utilities" competed vigorously and, like all other industries, they did not like competition. They first secured government-sanctioned monopolies, and then, with the help of a few influential economists, constructed an ex post rationalization for their monopoly power.

The economics profession came to embrace the theory of natural monopoly after the 1920s, when it adopted a more or less engineering theory of competition that categorized industries in terms of constant, decreasing, and increasing returns to scale (declining average total costs). According to this way of thinking, engineering relationships determined market structure and, consequently, competitiveness. However, the existence of economies of scale in no way necessitates either monopoly or monopoly pricing.

Practical examples

According to natural monopoly theory, competition cannot persist in the electric utility industry. The theory of natural monopoly fails on every count: competition exists and persists for decades in dozens of U.S. cities, price wars are not "serious," and there is better consumer service and lower prices with competition. Consumers themselves prefer competition to regulated monopoly and have gained substantial benefits from the competition, compared to cities were there are electric utility monopolies. Contrary to natural monopoly theory, costs are actually lower where there are two firms operating.

Telephone service was said to be a "classic" example of market failure and that government regulation in the "public interest" was necessary. But there was nothing "natural" about the telephone monopoly enjoyed by AT&T for so many decades; it was purely a creation of government intervention.

Once AT&T's initial patents expired in 1893, dozens of competitors sprung up. By the end of 1894 over 80 new independent competitors had already grabbed 5 percent of total market share. By 1907, AT&T's competitors had captured 51 percent of the telephone market and prices were being driven sharply down by the competition. Moreover, there was no evidence of economies of scale, and entry barriers were almost nonexistent.

Politicians began denouncing competition as "duplicative," "destructive," and "wasteful," and various economists were paid to attend congressional hearings in which they somberly declared telephony a natural monopoly. "There is nothing to be gained by competition in the local telephone business," one congressional hearing concluded. The crusade to create a monopolistic telephone industry by government fiat finally succeeded when the federal government used World War I as an excuse to nationalize the industry in 1918. AT&T still operated its phone system, but it was controlled by a government commission headed by the Postmaster General. Like so many other instances of government regulation, AT&T quickly captured the regulators and used the regulatory apparatus to eliminate its competitors. "By 1925 not only had virtually every state established strict rate regulation guidelines, but local telephone competition was either discouraged or explicitly prohibited within many of those jurisdictions.

The complete demise of competition in the industry was brought about by the following forces: exclusionary licensing policies; protected monopolies for "dominant carriers"; guaranteed revenues or regulated phone companies; the mandated government policy of "universal telephone entitlement" which called for a single provider to more easily carry out regulatory commands; and rate regulation designed to achieve the socialistic objective of "universal service."

External links

• Monopoly on Wikipedia
• The Development of the Theory of Monopoly Price: From Carl Menger to Vernon Mund (pdf) by Joseph T. Salerno, September 2003
• Fear of Monopoly by Brad Edmonds, March 2001
• What's Wrong with Monopoly (the game)? by Benjamin Powell, February 2004
• The Question of the Cable Monopoly by D.W. MacKenzie, August 2003