Monopoly and competition are two opposite kinds of business conditions. In a monopoly, one company or a cooperating group of companies controls the supply of a product or service for which there is no close substitute. In competition, several companies sell similar goods or services to buyers, so that none has any significant control over the product’s price.
The extent of rivalry between sellers, rather than the number of sellers in a market, determines whether there will be monopoly or competition. In some industries with only a few sellers, competition is vigorous, with each company trying to offer a better or cheaper product. Other industries have many sellers, but the companies act together as a monopoly would.
Kinds of monopoly and competition.
Economists divide market conditions into four major categories: (1) monopoly, (2) pure competition, (3) monopolistic competition, and (4) oligopoly.
In a monopoly, a single company supplies a product or service for which buyers cannot find a close substitute. A monopoly may arise when one company can supply a given commodity more cheaply than two or more companies can. Such “natural monopolies” often include utilities that provide electric power, gas, or water. A grocery store in a small isolated town may be a monopoly. Internet shopping has tended to break down monopolies, because buyers have access to companies around the world.
In pure competition, an industry consists of a sufficient number of producers selling nearly identical products, so that none has any significant influence over price. Pure competition is also unusual. In many countries, the sale of wheat and certain other agricultural products comes closest to this form of competition.
In monopolistic competition, rival businesses sell similar but not identical products. Each supplier has a monopoly on its own variety of the product, but there are many close substitutes. For example, hundreds of manufacturers sell different, but similar, styles of clothing.
In an oligopoly, a few companies dominate an industry. The policies of each company greatly influence the other firms because so few sellers are involved. The computer industry is a good example of an oligopoly.
Causes and effects of monopolies.
A monopoly may develop for a number of reasons. For example, a company may achieve the same volume of production more cheaply than its competitors because of greater efficiency. The more efficient firm may drive other producers out of business.
The reactions of rival firms to one another’s policies play a key role in determining the degree of monopoly or competition. For example, a company may hesitate to lower its prices if it thinks its competitors will quickly match the cuts. All the rivals would have lower profits, and none would increase its share of sales.
Monopolies generally set prices higher than would competitive companies with the same cost of production. Thus, monopolies generally make larger profits than competitive firms do. Unfortunately, a monopoly may sell a product of poor quality without losing sales.
In some industries, monopolies result from entry barriers, which are obstacles that prevent new companies from entering the market. Entry barriers could include one company controlling the supply of a raw material required to make a product. Licenses and patents, which give a business the exclusive right to produce a particular product, can be another form of entry barrier.
Monopolies created by patents illustrate both the benefits and the costs of limited competition. The holder of a patent on a product, such as a medicinal drug, controls the manufacture of that product. The company holding the patent can charge higher prices and make higher profits than it could if it were competing with many other sellers of the same product. This high price will prevent some people from buying the product who would do so if it were available at a lower price. Patent holders can use their additional “monopoly” profits to support research that leads to the development of new and better products. The high cost of research, however, can also act as a barrier to other companies entering a monopolist’s market.
History.
Early monopolies included European shipping companies that operated during the Renaissance (from about the 1300’s through the 1500’s) under royal charters. Kings, queens, and other rulers gave these companies exclusive rights to trade with people in Asia and other regions.
During the late 1800’s and early 1900’s, many business leaders in the United States tried to reduce competition. In some industries, many small firms merged to form large corporations. In other industries, corporations formed monopolistic combinations called trusts that cut prices to force smaller companies out of business and then limited production and raised prices. Huge trusts monopolized many fields, including the petroleum, railroad, and steel industries.
The abuse of monopolies and trusts led to a number of federal laws. The Sherman Antitrust Act of 1890 banned any trust or other combination that interfered with interstate or foreign trade. In 1911, the government used this act to break up the Standard Oil Company into more than 30 separate, competing firms. The Clayton Antitrust Act of 1914 made it illegal for corporations to group together under interlocking boards of directors. This law also prohibited several unfair business practices that large firms had used to eliminate smaller rivals. The Celler-Kefauver Act of 1950 tightened control over mergers that might reduce competition.
Today, antitrust laws in the United States are enforced by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. The FTC can order a company to stop unfair methods of competition. The Antitrust Division investigates and prosecutes businesses that violate antitrust regulations.
Other countries also have regulatory bodies that govern competition. These bodies include the Competition and Consumer Commission in Australia; the Competition Bureau in Canada; the Competition Commission of India; the Commerce Commission in New Zealand; the Competition Commission, a nongovernmental body, in South Africa; and the Fair Trade Commission in Japan. For member nations of the European Union (EU), such as the United Kingdom, the EU’s European Commission has the power to enforce rules concerning its treaty on competition. Countries within the EU may also enforce their own competition laws.
The United States government and most state governments have special laws to control public utilities. Government regulation replaces competition in setting prices and establishing standards of service for many of these utility companies.
