In , the Sherman Antitrust Act became the first U. In , two additional pieces of antitrust legislation were passed to help protect consumers and prevent monopolies:. Our Documents.
Federal Trade Commission. Library of Congress. Reports: United States v. American Tobacco Co. Microsoft Corporation. Accessed Sept. Was It a Success? Company Profiles. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads.
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List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is a Monopoly? Understanding a Monopoly. Types of Monopolies. Breaking Up Monopolies. Key Takeaways A monopoly consists of a single company that dominates an industry.
Monopoly Business economics Monopoly. Monopoly A pure monopoly is a single supplier in a market. Formation of monopolies Monopolies can form for a variety of reasons, including the following: If a firm has exclusive ownership of a scarce resource, such as Microsoft owning the Windows operating system brand, it has monopoly power over this resource and is the only firm that can exploit it. Governments may grant a firm monopoly status, such as with the Post Office, which was given monopoly status by Oliver Cromwell in The Royal Mail Group finally lost its monopoly status in , when the market was opened up to competition.
Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names, giving them exclusive rights to sell a good or service, such as a song writer having a monopoly over their own material.
A monopoly could be created following the merger of two or more firms. Key characteristics Monopolies can maintain super-normal profits in the long run. In general, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero.
See also: Natural monopolies Evaluation of monopolies The advantages of monopolies Monopolies can be defended on the following grounds:. Business Economics. Resources cannot be allocated to where they are most needed because the monopolist can erect barriers to other firms.
There are a number of ways in which the negative effects of monopoly power can be reduced:. Regulation of firms who abuse their monopoly power. This could be achieved in a number of ways, including:. Setting price controls. This price capping involves tying prices to just below the current general inflation rate.
Breaking up the monopoly into several smaller firms. For example regulators in the EU are currently investigating potential abuse of market dominance by Microsoft, which is under threat of being broken up into two companies — one for its operating systems and the other for software.
The monopolist can still be run along commercial lines, but be made to operate as though the market were competitive. In those cases where a monopolist is already State controlled, such as the Post Office , it may be necessary to engage in deregulation to enable it to become more efficient. Deregulation could be used to bring down barriers to entry and open up a previously state controlled industry to competition, as has happened with the British Telecom and British Rail monopolies.
This may help encourage new entrants into a market. Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth. Because inflation isn't supposed to occur in a weak economy, stagflation is an unnatural situation. Slow growth prevents inflation in a normal The laissez-faire economic theory centers on the restriction of government intervention in the economy. According to laissez-faire economics, the economy is at its strongest when the government protects individuals' rights but otherwise doesn't intervene.
Key Takeaways Key Points Single ownership over a resource gives the owner the power to raise the market price of a good over marginal cost without losing customers to competitors.
De Beers is a classic example of a monopoly based on a natural resource. De Beers had a lot of market power in the world market for diamonds over the course of the 20th century, keeping the price of diamonds high. Key Terms market power : The ability of a firm to profitably raise the market price of a good or service over marginal cost. A firm with total market power can raise prices without losing any customers to competitors.
Economies of Scale and Network Externalities Economies of scale and network externalities discourage potential competitors from entering a market. Learning Objectives Define Economies of Scale. Key Takeaways Key Points Economies of scale are cost advantages that large firms gain because of their size. Natural monopolies arise as a result of economies of scale. Natural monopolies have overwhelming cost advantages over potential competitors.
Network effects occur when the value of a good or service increases because many other people are using it. This makes competing goods or services with lower levels of adoption unattractive to new customers. Key Terms economies of scale : The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.
Network externalities : Are evident when the value of a product or service is dependent on the number of other people using it. Natural monopoly : Occurs when a firm is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. Government Action There are two types of government-initiated monopoly: a government monopoly and a government-granted monopoly. Learning Objectives Discuss different types of monopolies initiated by government.
Key Takeaways Key Points Government-granted monopolies and government monopolies differ in the decision-making structure of the monopolist. In a government-granted monopoly, business decisions are made by a private firm. In a government monopoly, decisions are made by a government agency.
In a government monopoly, an agency under the direct authority of the government itself holds the monopoly. In both types of government-initiated monopoly competition is kept out of the market through laws, regulations, and other mechanisms of government enforcement. Key Terms Government monopoly : A form of monopoly in which a government agency is the sole provider of a particular good or service and competition is prohibited by law.
Government-granted monopoly : A form of monopoly in which a government grants exclusive rights to a private individual or firm to be the sole provider of a good or service. Legal Barriers The government creates legal barriers through patents, copyrights, and granting exclusive rights to companies.
Learning Objectives Identify the legal conditions that lead to monopolistic power. Key Takeaways Key Points Intellectual property rights are an example of legal barriers that give rise to monopolies. A copyright gives the creator of an original creative work exclusive rights to it for a limited time. This provides an incentive for the continued creation of innovative goods.
A patent is a limited property right the government gives inventors in exchange for the details of their invention being made public. The government can provide exclusive or special rights to companies that legally allow them to be monopolies. Key Terms Copyright : A legal concept that gives the creator of an original work exclusive rights to it, usually for a limited time, with the intention of enabling the creator to be compensated for his or her work.
Natural Monopolies Natural monopolies occur when a single firm can serve the entire market at a lower cost than a combination of two or more firms. Learning Objectives Demonstrate an understanding of how a natural monopoly is created. For a natural monopoly, the average total cost continues to shrink as output increases. Other firms are discouraged from entering the market because of the high initial costs and the difficulty of obtaining a large enough market share to achieve the same low costs as the monopolist.
Learning Objectives Identify the common conditions that lead to monopolistic power.
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