DEFINITION: A monopoly is a market that is heavily or exclusively dominated by a single seller.
ETYMOLOGY: From the Greek words for “single” (monos) and “to sell” (pōleō). The opposite of a “monopoly”—that is, a market dominated by a single buyer—is called a “monopsony.”
USAGE: Over the past two centuries or so, monopolies have played an important and controversial role in the history, not only of theoretical economic analysis, but also of practical government legislation.
The theoretical problem with monopolies is very simple: by exercising overwhelming domination of a given market, the monopolist undermines the efficiency-inducing mechanism of competition. In this way, a monopolistic market arguably fails to qualify as a “free market.” Certainly, it is a market in which the usual mechanism for determining the optimally efficient price—meaning the price that simultaneously satisfies the requirements of the seller and the buyer as well as possible—is lacking.
On the other hand, in most cases free markets are distorted by government actions, whereas in the classic case of a monopoly under conditions of capitalism, it is a private entity that creates the monopoly condition in a given market. Here we are excluding the case of socialism, in which it is the government that creates the monopoly condition.
But if the result of competition under free-market conditions is the success and continued growth of the most efficient enterprise until it holds a monopoly on its market, then it is not clear why this should be regarded as a transgression against the free market, at least from a purely theoretical point of view.
As a further complication, it is necessary to distinguish between “natural monopolies” created endogenously by the overwhelming success of one enterprise operating within a free market and “artificial monopolies” created by some exogenous action, such as a special government privilege (price support, tax exemption, etc.) granted to one favored enterprise operating in a market but not others. The question of whether monopolies can be viewed as consistent with free-market principles applies, of course, only to natural monopolies. Artificial monopolies violate free-market principles by definition.
We are now in a position to see that the question of the legitimacy of natural monopolies from a free-market perspective is not just of theoretical interest. That is because monopolies may have unpleasant practical consequences (such as inflated prices) that warrant government intervention. The goal of such intervention would be to restore competition in the market in question. The means to that goal would be to curtail the monopolistic company’s market domination through some sort of legislative action.
This practical aspect of the monopoly question has played an important role in US legislative history. The most famous of such initiatives was the Sherman Antitrust Act of 1890, which placed limits on the size and activities of the industrial conglomerates in railroads, steel, and other industries, which had come into existence over the course of the nineteenth century.
Another well-known example is the 1982 consent decree between the US government and AT&T, Inc. (“Ma Bell”), the holding company which controlled the entire network of seven regional Bell System companies (“Baby Bells”), which collectively controlled almost all long-distance telephone communications in the US. Under the decree, the seven Baby Bells became independent companies in their own right.
In a similar way, calls are being heard today to break up some of the leading Internet-based companies which function as monopolies or near-monopolies, including Facebook, Twitter, Google, Amazon, and others.