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School of Management and Business

Ysgol Rheolaeth a Busnes

EC10120 - Economic Principles and Skills ISemester 1

Monopoly, translated literally from Greek, means a ‘single seller’ or ‘to sell alone’. It occurs when on the market there is one single person or a firm that supplies a given commodity, good, etc. In present days it happens to be one of the main economical problems that troubles our society mainly because of the character of the most countries’ economies, which are based on the principle of perfect economic competition and can’t bear a single firm controlling the market from which only the consumer will suffer. Monopoly is the opposite of monopsony, which is a market, controlled by a single customer, not by a single seller and is also not to be mistaken with oligopoly, that happens to be a market controlled by several entities, up to 5, not only by a single one. Monopolies exist since ancient times as the first example to ever be described is by Aristotle and concerns the market of olive presses. There are three types of monopolies in general – Natural monopoly and Government imposed monopoly and monopoly formed by merger of two or more companies.

A Natural monopoly can occur when a seller has taken over the market by a technology or a product or has another advantage which prevents the competitors to compete on the market with the given seller. A recent example of natural monopoly is the case of the Microsoft Corporation monopoly in the market for operating systems where the competition basically stood no chance against the much superior and user-friendly product of Microsoft. That is why the US government forced the corporation to change its behaviour against the competition in order to protect the customers. Another past example of Natural monopoly is the vending of salt - the market was dependent upon the level of the sea as a great source of salt and any variations of the sea level caused the customers to depend on the one firm that controlled the inland resources of salt. In a small-scale markets where a monopolist company abolishes competition by being able to give better prices to the customers and markets on which one major monopolist firm is enough and can take all the consumption of a given good or service are also Natural monopoly examples. This was the case with the Irish Railway company, Iarnród Éireann, as Ireland does not have the range for any more railway companies.

A Government imposed monopoly is a form of monopoly in which the government controls, through laws and regulative measures the market and the companies on it. This usually happens by the means of state owned firms and legislations. These types of monopolies are known as coercive monopolies and they prohibit competition using unfair practices which come with the market and even political power of firms of that size. There are many reasons why the government might want to interact with the market but most common are to protect the consumers or the population of the country, because if the monopolist seller is not coerced legally there is a tendency to maximizing profits by producing fewer or lower quality commodities and selling it at higher prices to the buyers.

Another example of coercive monopoly is the government-granted monopoly. It is used for granting advantage for a company to be the only provider of a given commodity in a particular sector of the market and all the competition is excluded in this sector either by laws or another type of measures. Usually this company is state-owned. This type of monopoly is also

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known as legal monopoly as it could be sanctioned by the state and encourage given organisation to invest in risky aspect of the business of the given country. Salt commissions in China by the year 758 are excellent example of past time legal monopoly. Copyrights, trademarks, patents are all forms of government-granted monopolies. If, which often is, all the rights are kept for the government, as well as the firm itself, this happens to be a government monopoly.

A merger-formed monopoly occurs when two or more than two competitive business organizations on the market of a single country, instead of splitting market shares among themselves merge into one, which becomes a monopolist company on the same market. This happens on small-scale markets and when the companies decide that they are not making enough profit by themselves and agree to cooperate with the other firms in order to maximize profit as a whole.

Whether governments should or should not legislate to prevent monopolies is a topic discussed on many occasions. On the one hand, when open market rules fail to end a firm’s monopolist control of the market government usually implicates either by regulating it, convert it into publicly owned enterprise or fragment it. An example of such government fragmentations of monopolies are the cases of the American Telephone and Telegraph (AT&T) company and Standard Oil company. On the other hand, there is nothing wrong with a firm owning major market share of a given market, because this does not necessarily mean that the consumer are going to pay for overpriced goods with not that great quality since there is always the possibility of new firms entering the market which would balance the prices on their equilibrium point. A monopoly in itself is not illegal, according to the Law of competition, but rather abusing its power over the organisations with less market share through unfair practices causes all the trouble for major market share holders. ‘According to professor Milton Friedman, laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing tariffs and other regulation that upholds monopolies.’1

In conclusion I would like to add that monopolies are a needed element of the market of every single country as long as they do not put obstacles in the path of the smaller companies and prevent them from developing, which causes only unwanted trouble for us, the consumers.

Bibliography:1 http://en.wikipedia.org/wiki/Monopoly

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1. Begg, D., Dornbusch, R. and Fischer, S. (2008). Economics, (9th Edition), Maidenhead: McGraw-Hill

2. Sloman, J. and Wride, A. (2009): Economics. (7th Edition), Harlow: PrenticeHall

3. http://en.wikipedia.org/wiki/Monopoly

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