A monopoly is a special case of market structure in which one seller or producer controls the whole industry. This sort of market configuration is often criticized by economies that promote free-market ideals because such a monopoly can stifle competition and reduce consumer choices. In the United States, special legislation is often called anti-trust laws to combat monopolization. These laws are intended to prevent one entity from dominating a market and thus enable consumers to avoid exploitation by someone controlling them.

There is no competitive force within its market and no substitutes for consumers. Monopolies can push prices in their direction and create a high barrier to entry for any prospective competitors who want into that same market. One is vertical integration, where companies gain control of the whole production and sales process. Another strategy is horizontal integration: getting hold of competitors in the marketplace. It makes them the sole supplier. Monopolies benefit from economies of scale, enabling them to manufacture in large quantities cheaply. English law used ' Monopoly' to indicate a crown-granted exclusive privilege. This right allowed just one merchant or corporation to trade a specified product.

Traditionally, monopoly rules occurred due to exclusive rights granted to one producer by the government. The FCC-AT&T agreement, from 1913 to 1984, is an excellent example. Based on this mistaken belief that the market could only accommodate one player, no company was allowed to compete with AT&T in telecommunications. Rather, they were all controlled by it as a monopoly. More recently, companies may behave like monopolists in industries with high initial costs for a time. Thus, they can produce more cheaply than their competitors, thereby temporarily capturing a larger portion of the market.

Different Types of Monopoly

The Absolute Monopoly

This is where there's just one seller in a market or industry, often due to substantial initial costs, which act as entry barriers, and the product on offer has no close substitutes. For instance, Microsoft Corporation historically held such a position in the personal computer operating systems market. Even as of 2022, its Windows operating system retained a significant market share.

Monopolistic Competition

This scenario of monopoly companies involves several sellers in a market where products are similar but not identical. Entry barriers are relatively low. Firms in such markets differentiate themselves via pricing strategies and marketing. These products are not quite direct substitutes but are more similar in concept to Visa and MasterCard. This group also includes retail stores, restaurants, and hair salons.

The Natural Monopoly

This monopoly arises due to exclusive access to raw materials, advanced technology, or specialized expertise. Like many in the pharmaceutical industry, companies with patents or those that incur substantial costs in research and development are examples of natural monopolies.

Public Monopolies

These monopoly companies are typically in sectors providing essential services, such as utilities. Often, a single company is designated to supply a service like electricity or water to a specific area. These monopolies are permitted but are usually subject to stringent government regulation, including control over pricing and rate increases.

Advantages and Disadvantages of Monopolies

Pros: Monopolies can maintain stable prices due to the lack of competition. They often benefit from economies of scale, producing large quantities at a lower cost per unit. Being the sole player, a monopoly can invest in innovation without the immediate threat of competition.

Cons: At the same time, a strong company can exercise its advantage by deliberately restricting supply to create artificial shortages, fixing prices at unreasonable levels, or producing low-quality products. In such markets, consumers have to trust the monopoly's inherent honor since there are no alternatives.

Regulating Monopolies

Several laws have been promulgated to oppose monopolistic practices, protect consumers, and promote open markets. The Sherman Antitrust Act, put forward in 1890 by the U.S. Congress against what were early forms of monopolistic business structures (trusts) that would manipulate prices through collusion between companies trying to gain market share but oligopolize it instead, was intended precisely to restrain trust power. This legislation broke up forces like the Standard Oil Company and American Tobacco.

The Clayton Antitrust Act of 1914 further strengthened these efforts by establishing procedures for company mergers, standards of conduct to be observed by corporate directors, and stating what types of business practices would infringe the Sherman Act. Moreover, the Antitrust Division of the U.S. Department of Justice and a regulator called the Federal Trade Commission were established through the FTC Act (i.e., The New Brand: A User's Guide). These two bodies can uphold these regulations on antitrust conduct in practice.

The dissolution of AT&T was a milestone in U.S. antitrust enforcement. AT&T monopolized government-sanctioned telephone services nationwide. However, after being investigated for antitrust violations in 1982, it was forced to spin off the control of 22 local exchange service companies and finally lose its monopoly. Therefore, they also opened the door to competition. Microsoft was accused of crushing competition with its PC OS monopoly in 1994.

It was accused of inhibiting commerce by monopolizing its operating system via exclusive and competitive contracts. Federal district judge split Microsoft in 1998. But this decision was later reversed on appeal so that Microsoft could continue its operating system development and application and marketing strategy without any partition.

Implications of Monopoly Markets

A common concern in politics and society regarding monopoly rules is their potential to overcharge customers. In a market where a monopoly reigns, lacking competing suppliers for a particular product or service, the monopoly can set higher prices. The main issue here is often the inflated cost to consumers rather than the monopolistic practices themselves. The primary economic criticism of monopolies takes a different angle. From a neoclassical economics perspective, the problem with a monopolistic market is not necessarily the high prices but the restriction of market output. By limiting production, monopolies can decrease the overall real social income.

However, even in cases where monopolistic power is evident, such as the U.S. Postal Service's legal monopoly over first-class mail delivery, alternatives often exist for consumers, like opting for services from FedEx, UPS, or email. This availability of other options makes it rare for monopolies to successfully limit market output or maintain excessively high profits over a long period.