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The term “monopoly” typically attributes to a corporation or enterprise that has a strong influence over a particular industry, such as food products or electronics. Monopolies can be thought of as an absolute result of free-market capitalism, a supply and demand system with minimal government interference. An individual association or corporation that becomes so vast that it occupies most or even all a particular market is a possible outcome of free-market capitalism.
Many monopolies show what their capable of through price discrimination, which is when the company adjusts the price or abundance of a commodity at their discretion. This kind of pure monopoly dominates the market in such a way that competition is nearly impossible. Pure monopolies typically benefit themselves at the expense of others, and since competition is nonexistent this can lead to unfair prices for consumers, menial services and products, and overall fraudulent behavior. These businesses can also monitor and alter the supply and demand of a particular product and tamper with the development.
Prices of the product are typically higher than those of production and due to higher prices consumers will request a lesser amount, therefore, the enterprise makes more money than it would if competition was contemporary. The result of there being no competition is that customers can only buy the product from the corporation that has a monopoly over it. These are many overwhelming advantages, however, to maintain this strict monopoly there must be barriers to obstruct competitors from accessing the market. Due to this inefficient and unequal system, these types of monopolies are generally illegal.
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The United States government has instituted many laws to prevent monopolies from dominating the marketplace. The Sherman Antitrust Act was the first piece of legislation approved by the U.S. Congress to hinder monopolies. It outlawed all trusts, including monopolies and cartels, and had the main purpose of increasing competition in the workplace thus boosting the economy. The act is a primitive illustration of capitalist “competition law” which was devised to guarantee that the workplace remained competitive.
This legislation was first suggested by U.S. Senator John Sherman from Ohio in the year 1890. The law went on to be passed as 15 U.S.C. §§ 1-7 but was later amended in 1914 by the Clayton Act. The bill was signed into effect by President Benjamin Harrison on July 2, 1890. The Sherman Act contained three sections, two of which relating to monopoly’s and anticompetitive conduct while the third simply extended these legislations to U.S. territories and the District of Columbia. At the time the law was passed, the public had been highly opposed to large company’s holding monopolies on certain industries such as the American Railway Union and Standard Oil.
As a result, the public approval rating of this bill was exceptionally high, this includes consumers who were paying high prices on fundamental goods and businesses who could not compete with the major corporations. However, due to an inaccuracy of specifically stating concepts and definitions of trusts, hardly any businesses were actually indicted under its regulations, therefore, the Clayton Act was formed to provide further insight on some topics addressed in the Sherman Act. The Clayton Act was formed by Alabama politician Henry De Lamar Clayton Jr. in 1914, and President Woodrow Wilson approved the bill and made it law on October 15, 1914.
This act simply builds on the foundation that the Sherman Act created by clarifying the topics that it contained and adding several more. The main topics that it focuses on are price injustice, price fixing, and unethical business practices. The Clayton Act also asserted “peaceful strikes, picketing, boycotts, agricultural cooperatives, and labor unions legal under federal law” and banned absolute sales arrangement, specific rebates, and regional price reduction (Investopedia.com). Today the Clayton and Sherman Acts are still enforced by the Federal Trade Commission (FTC).
As a result of antitrust laws, antitrust lawsuits have become much more popular. The Bell Atlantic v. Twombly case was a very popular lawsuit that made it to the United States Supreme Court and provided a basis of structure for the courts that we still use today. Bell Atlantic, a telecommunications company, was the defendant and William Twombly was the plaintiff. Twombly had accused Bell Atlantic of violating Section 1 of the Sherman Act, which constrains agreements in restraint of trade, including bid-rigging, price-fixing, etc. This alleges that Bell Atlantic colluded with other large telecommunication corporations through parallel conduct, when “one or more companies intentionally adopt the practices of some competing company,” to constrain the uprising of upstart telephone companies and liquidate competition with each other (Polsinelli.com).
The purported purpose of the conspiracy was to approve each regional telecommunication company to hold dominance over a distinct market. In the district court, the defendant was moved to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, and the court did grant the motion, however, the U.S. Court of Appeals for the second circuit had reversed the adjournment. Once overturned, the United States Supreme Court granted review in 2006. After being reviewed, the Supreme Court reversed the decision of the district court, discharging the complaint for failure to bring forth an assertion under rule 12(b)(6). Since the case ended with Bell Atlantic on top, this was a big win for telecommunication companies and set a market standard.
When there is an abundance of competition in a market then prices typically go down for consumers since each company wants to attract consumers the most, and they can only achieve this by having the lowest prices through sales. As the FTC puts it, “Aggressive competition among sellers in an open marketplace gives consumers — both individuals and businesses — the benefits of lower prices, higher quality products and services, more choices, and greater innovation” (FTC.gov).
Competition among the market is definitely better and many monopolies are illegal and unfair, however, some are necessary and are very beneficial to consumers and the public or just happen naturally, thus the name natural monopolies. Natural Monopolies are monopolies that exist due to the lofty fixed price of operating a business in a specific market. Natural monopolies can exist for a multitude of reasons such as it being the only company that can meet the demands of handling a certain industry, or the corporation may have a patent over the product, therefore limiting the number of competitors. There are several monopolies made and supervised by the government to “provide essential services and goods” (Investopedia.com).
The United States Postal Service is one that is run by the government but does not exactly have a monopoly due to private companies such as the United Parcel Service (UPS) and FedEx. The government also has to manage the utility sector to ensure that there is only one dominate private enterprise supplying necessities and to safeguard costs for the public. The government could let competition amongst utility businesses keep the price low, but this would result in an overwhelming amount of power lines and utility poles and would make the overall landscape look grotesque and unpleasant.
As discussed in the previous paragraphs, natural and pure monopolies play an imperative role in our society today and can be misleading, corrupt, or beneficial but there are many different types of monopolies in our current society that are seen every day. Geographic monopolies are when a corporation provides a product or service only to a local or regional area. When the consumer support is not vast enough to need competition, a local business can easily take over and cause a small-scale monopoly to form in that one area. Businesses such as gas stations or grocery stores may hold a geographic monopoly on a small town or rural area, and when competitors come into the small-scale area to compete, they typically close soon after, reasserting the geographic monopoly’s power.
As stated in the previous paragraph, some natural monopolies hold the only monopoly on a particular product because they have a patent on it, these are also known as technological monopolies. Electronics companies have technological monopolies on a product when they patent it because competitors are prevented from producing and selling the same product. Even precise components cannot be used within products that do not have a patent over the component or do not have the company’s discretion, as such, many competitors must produce knock-off’s or off-brand products so they do not violate the corporation’s patent. As a result, these products typically do not deliver the same quality that their opponent can and do not sell well or are much cheaper in price.
Many governments are monopolies as well. Governments can provide retail stores and many services under their firmly secured monopoly. Some examples are, “government-run alcohol sales and national health care programs[,] . . . local and national parks, police services, fire departments, municipal water and sewage services, government ID issuers and voter registration services” (Bizfluent.com). Many governments in the world are monopoly’s themselves and have no competition because governments are typically forced to provide these things anyway by the people, therefore, the government regulates these services, but the people choose whether or not they want them, at least in a democracy.
Vertical integration is when an enterprise acquires control over two or more production steps included in the formation of a certain item or product. The four main phases of the supply chain are commodities, manufacturing, distribution, and retail. Forward integration is when a company starts at the beginning of the production line and works their way toward the end going “downstream,” while backward integration is when the business does the exact opposite and starts at the end of the chain and slowly expands and moves “upstream.”
Vertical integration is so useful mainly because it allows you to cut out the middleman and offer a name brand product at a lower cost for the consumer. An example could be Target, which admits its own store brands, controls the distribution and manufacturing, and is the only retailer of its products. Horizontal integration, on the other hand, is when a corporation annexes a business functioning in the same industry. Businesses typically do this to increase its size, make its services or products more varied, lower production costs, or increase their customer database and outreach.
When two businesses are merged, they produce more revenue than they would have ever been able to do alone, but when mergers do happen, they are typically at the expense of the consumer. When the two businesses reduce competition after they merge, they form an oligopoly, which is when several firms all dominate the marketplace and have significant influence on each other. Horizontal integration allows companies to profit from synergies which in turn allows them to produce products in a more lucrative way rather than manufacturing the products themselves. However, not all mergers result in a synergy, and sometimes mergers can even cause the value of the business to decline or could attract the attention of the FTC if it threatens competition.
Sources
- https://www.investopedia.com/terms/m/monopoly.asp
- https://www.investopedia.com/terms/f/freemarket.asp
- https://financial-dictionary.thefreedictionary.com/Free-market+capitalism
- https://www.consumer.ftc.gov/sites/default/files/games/off-site/youarehere/pages/pdf/FTC-Competition_How-Comp-Works.pdf
- https://www.investopedia.com/terms/s/sherman-antiturst-act.asp
- https://www.investopedia.com/terms/c/clayton-antitrust-act.asp
- https://www.polsinelli.com/
- http://www.onelbriefs.com/cases/civpro/bellatlantic_twombly.htm
- https://www.quimbee.com/cases/bell-atlantic-v-twombly
- https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws
- https://bizfluent.com/list-5972946-types-monopolies-economics.html
- https://www.investopedia.com/terms/v/verticalintegration.asp
- https://www.thebalance.com/what-is-vertical-integration-3305807
- https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp
- https://www.investopedia.com/terms/h/horizontalintegration.asp
