On the 8th of January 1982, the telecommunications company AT&T was finally mandated to split into 7 independent companies. At that time, it was the only provider of telephone service throughout almost all of the United States. Moreover, most telephone equipment was provided by Western Electric, its subsidiary, which resulted in a vertical integration system, where a company owns its supply chain. Unsurprisingly, the United States Department of Justice filed an antitrust lawsuit against the company, resulting in its final decomposition. Having existed since the 17th century, the first being the Dutch East India Company, monopolies have often been associated with price gauging and a lack of innovation. However, how do they obtain this power, and is it always bad?

How they gain power

Since the government is a powerful player in the market, a governmental grant that gives companies unique access to a good or service would allow a company to obtain monopoly power.  A famous example would be that of the British East India Company. The British government gave them exclusive rights to trade goods between Britain and India in the 17th century. This meant that of all the imports to Britain in 1720, 15% were from India, almost all of which were administrated or influenced by the company. At the peak of its power it was the de facto ruler of India, and even had the ability to implement taxes and use armed forces. An extremity of this mechanism is nationalisation, allowing the government itself to easily create a monopoly by taking control of an industry. In the UK, the Transport Act 1947 nationalised the four major railways, which was extended to the entire industry in 1948 under British Railways. In fact, in communist regimes almost all industries were nationalised, such that the problems with a monopolistic market were extended to the economy as a whole. 

There are also routes to achieve near monopoly power through intellectual property rights. While patents and copyright laws exist to protect and incentivise innovation, they also give creators of intellectual property monopoly power over that concept as other people cannot legally compete with a similar product. This is especially common in the pharmaceutical industry, where insulin is almost exclusively produced by Novo in the United States and epinephrine is monopolised by EpiPen. 

Incumbent firms can also adopt predatory approaches. For example, short term price limiting seeks to deter entrants and make competitors go out of business, often enabled by economies of scale (the proportionate reduction in cost through an increased level of production). Larger companies, including monopolies, have much more capital such that even if it does not make as large a profit it can still survive, unlike smaller entrepreneurial competitors. This means that they can lower the price of a product, risking a decrease in revenue, but stamping out competitors who cannot lower the price as much. Furthermore, it is very likely that the monopoly has developed efficient ways to make the product that finds a compatibility between speed and quality through research and development (R&D). Similarly, once an initial portion of a market is gained, firms can use marketing strategies and exploit the ‘network effect’ – where the more users gained, the better a product becomes. This is demonstrated by Google, who utilised a combination of these to topple the internet giants of the time, such as Yahoo. 

Once monopoly power is obtained, there are a few factors which help to retain this power. The same economies of scale that enable their creation grant them the ability to continue stamping out competition. Moreover, there are also technological barriers that prevent the rise of challengers to the monopoly. Most manufacturing processes require sizeable start-up costs to gain the best technology to produce the best goods. Smaller competitors are less likely to be able to afford that cost in the first place, and even if they do, have the expertise to use it. Finally, it is more likely for an individual to use the product of a large monopoly rather than a novel start-up. Monopolies will have a large pool of customers who have used them for a long time and are therefore loyal, such as Amazon.

Why monopolies are bad

Monopolies are able to be proactive in profit-seeking, instead of reactive in price setting. The quantity which is profit maximising is when the Marginal Cost curve meets the Marginal Revenue line, which is therefore the quantity they produce. In order to price gauge, the company is able to raise the price until it meets the demand curve, where the dark rectangle represents the profit above the cost. Comparatively, in perfect competition, the quantity set is where the Average Cost meets the Demand curve, creating an area known as deadweight loss that signals the inefficiencies within a monopolistic market by depicting the decrease in social welfare.

However, there are many situations where it is in the interests of the customers to have a monopoly, deemed as a natural monopoly, including the provision of water, electricity, or energy. Here, the initial start-up costs are so great that it is unfavourable to have competing firms; for example, for an electricity corporation, the capital needed to install cables is a prerequisite behind providing cheaper, more accessible electricity. Since they are able to exploit economies of scale, prices are only dropped once that high barrier of entry is overcome. Furthermore, efficiency can be optimised as the duplication of infrastructure (prevalent and significant within utilities) is prevented. 

Simultaneously, a host of regulatory actions can ensure that monopolies maintain healthy market practices. For example, in the US, the Sherman Antitrust Act of 1890, prohibits any action intentionally and unreasonably excluding firms from the market. There are several actions that are often considered monopolistic and therefore unlawful:

• Price Fixing – where oligopolists agree to fix supplies and therefore control prices.
• Predatory Pricing – where a good or service at a substantially lower than normal market price to remove competition such that in the future they can increase price. A famous example is where Microsoft Office was initially given out for free, eliminating competitors, and now charges an expensive subscription fee.
• Exclusionary Practices – When a company sells a product to customers under the condition that those customers do not buy from any other competitor.
• Group boycott – Where several companies collectively refuse a deal with another to reduce competition.

Alternatively, governments can mitigate the effects of a monopoly instead of (or in addition to) preventing its existence. This exists mainly in the form of price regulation. If the price is set where the Marginal Cost (MC) curve intersects the Demand curve (this is where prices in a perfect competitive market are set – the lowest that firms can set while still earning profit), the Average Cost (AC) curve is higher, meaning that the firm will suffer losses and therefore go bankrupt. Therefore, the price has to be capped at where the AC curve meets the demand curve. This is enough to cover its average costs and earn a normal rate of profit, but prevents the firm from raising prices and earning supernormal profits. 

In reality, monopolies exist in a more complex way than economic models might portray them to be. They still need to innovate, as alternative methods of achieving the same goals are becoming ever more customary in the face of technological revolutions (such as AI and biotechnology). Similarly, we must engage beyond the intuitive impulse to denigrate monopolies, where natural monopolies are in fact the cornerstones which provide our most basic needs.