We love the word monopoly. It’s super fun to say, for one. And two, they seem to be everywhere. From your cellphone company to your favorite social media platform. But what is a monopoly and why are we so fascinated with the idea?
A true monopoly is when a single person or company is the only supplier of a product or service for which there are no close substitutions.
This leverage allows them to monopolize the market and control the price of the product or service.
This control over the price prevents competitors from entering their market. A monopoly can drop the market price to nothing. Alternatively, they can bottleneck the supply of the product or flood the market with the product making the demand drop substantially.
In either case, their control can bankrupt companies that are in the market or deter other companies from entering the market almost instantly.
Thus, the single company continues to control the price as well as the market supply and/or demand. This unreasonable control makes the barrier of entry impossibly high for new businesses and can wreak havoc on the economy and push consumers around.
Which is a horrifying thought.
But true monopolies (also called pure monopolies) are incredibly rare, so regulators and other agencies usually consider their monopoly power when deciding if they need to intervene or not.
What Is Monopoly Power?
Monopoly power is often called market power, which is decidedly less fun. Both terms refer to one company’s ability to control the price of an item or service by manipulating the supply, demand, or both.
The companies that wield the most market power are called “price makers.”
Price makers can set their price higher or lower without giving up their market share or having any serious repercussions. That is, the change in price won’t damage their sales or profit, but will likely damage other businesses.
For example, think of the best cellphone service provider.
If they brought everyone’s bill up by $20 a month, do you think most of their customers would leave? Probably not. And they probably wouldn’t lose any serious cash.
Now, if they brought their plans down below competitors’ pricing, do you think their competition would last more than a year without going bankrupt? Also probably not.
That’s monopoly power – or market power – at work.
It’s not a number or a concrete measurement, but a company’s ability to control the market. And that’s what regulatory agencies use to determine when a company becomes too powerful.
And, just for fun… did you also think Verizon?
Are Companies Like Verizon, Facebook, Google, & Amazon Monopolies?
They’re monopolistic, but they’re not a monopoly – and that’s an important distinction. But before we can get into why… let’s cover what makes a monopoly:
- Single person or company (check)
- No close substitutes (check)
- Exerts control over market and price with no recourse (maybe, depending on your view)
- Poses a high barrier of entry for competitors (in some case, but through mind share versus market control)
- A lack of competition in the market (BIG nope)
On the exact opposite side of the spectrum, there’s a theoretical market structure called perfect competition. Which is as nauseatingly cheerful as it sounds.
What makes a “perfect competition”:
- All competitors sell identical products
- Competitors have zero influence over the price
- Buyers have complete information about the products
- Competitors can enter and exit the market without cost
Okay, so that was horrifically optimistic about the way the world operates, right? And it’s not realistic – or real. It’s a theoretical idea about what it would look like if everything was equal.
But obviously the world doesn’t operate on idealism.
On the flip side, however, it’s hard to make, maintain, or generally be a monopoly. Somewhere in the middle is something called monopolistic competition.
And that’s where you’ll find companies like Google, Verizon, and your favorite Thai place.
Monopolistic competition is when many businesses offer a service or product that’s similar. But they’re not perfect substitutions. It’s the realistic and mostly-grey-area between monopoly and perfect competition.
Facebook, for example. Are there other social media substitutes? Yes. Are they perfect replicas of Facebook? No.
Similarly, can you use a search engine other than Google? Yup. Are the results as pertinent and is it an exact replica of Google? Of course not.
And it’s the same with your favorite restaurant, hairdresser, clothing company, and even the eggs you buy.
Are there plenty of other similar products? Yeah.
But they’re not perfect substitutions because they all offer something slightly different. Even if it’s ever-so-slight, it’s different.
So most companies aren’t monopolies, they’re monopolistic. When it turns from monopolistic to a monopoly is typically when one company holds a disproportionate share of businesses within its vertical or horizontal markets.
For example, if Google owned 90% of the search engine options you had available. Or Verizon owned 90% of everything from production to retail for mobile phones.
So, Google, Verizon, Facebook, and similar behemoths aren’t monopolies. But monopolies have still existed, of course.
True Monopoly Examples
Monopolies typically fall into three categories:
- Natural monopolies: the cost doesn’t justify the return for competing companies.
- State monopolies: the state has full control over a product or service – like your utilities.
- Unnatural monopolies: a hybrid of a state and a natural monopoly. Patents, emerging markets, and disruptive products are examples of unnatural monopolies.
How monopolies can emerge, however, is vast. From hostile takeovers, mergers, and the like, all the way to geographic markets and bans or tariffs on imports.
Hostile takeovers, mergers, and acquisitions is usually what we think of because, historically, that’s what we’ve seen so often.
Andrew Carnegie’s Steel Company (A Legal Monopoly)
Yes, monopolies can be legal. In order to understand what happened here, we have to understand the climate of the mid-1800s.
In 1856 Henry Bessemer invented the Bessemer. A bellow-like machine that made steel purer – at a fraction of the cost and time it previously took. Simultaneously, railroads were popping up everywhere. Predominantly made from steel, of course.
This becomes important because, at this point, Carnegie decided to start investing in what was considered the “hot market” at the time. Steel.
Between the lowering costs and the rising demand, the market was ripe for a boom.
Over the following 20+ years, Carnegie went on to create a vertical monopoly within the steel industry. He eventually acquired a business in every stage of the steel manufacturing process. From raw materials to financing, Carnegie gained control of the majority of the industry in the US by 1897.
In 1901, Carnegie merged with US Steel to become the largest steel company to exist. At the time, that is. Which was the Carnegie Steel Company.
In the same year, he sold the entire company to John Pierpont Morgan for $480 mill. Which would be a hefty $14.5 billion in today’s market, if you were wondering.
By 1920, the Carnegie Steel Company – at that point American Steel – was tried in Supreme Court. They were, indeed, a monopoly. But not in violation of any laws that made it an illegal monopoly.
And, thus, they were allowed to continue to dominate the market. So, a happy ending… I guess?
John D. Rockefeller’s Standard Oil Company (Illegal Monopoly)
Let’s flip back to 1863 – four years before Carnegie entered the steel business. And 15 years before Rockefeller was one of the most hated men in existence.
The oil industry was still in its infancy and poised to become an emerging market. But not for cars (which wouldn’t be widely available until 1908.) Instead, oil was used for lighting still, since functioning lightbulbs wouldn’t be invented for over a decade.
Rockefeller joined an oil refinery run by Maurice Clark and Samuel Andrews. Which, at the time, was predominantly contained to Cleveland, OH.
By 1667, Rockefeller had bought out Clark and invited Henry M. Flager to join him as a partner. Three years later, the three of them were operating the largest oil refineries in Cleveland.
By 1870, they changed their name from Rockefeller, Andrews, & Flager to Standard Oil. Or, if you prefer formality, Standard Oil Company & Trust.
By 1880, Standard Oil controlled 90% of the refineries, pipelines, and distribution of oil in the US. Most believe that this unrivaled power was obtained through hostile takeovers, predatory pricing, collusion, and coercion.
In 1911, the Supreme Court ruled that Standard Oil was an illegal monopoly and forced them to break up the business. The result?
Contrary to popular belief, it’s the ruling – not the monopoly itself – that made Rockefeller one of the richest people ever.
This single verdict skyrocketed his net worth to a staggering $400 bil by today’s inflation. Bill Gates, if you were wondering, sits around $104 bil.
Apparently, one big business isn’t worth as much as 34 smaller ones.
The remnants of this dissolution are still around – including ExxonMobile, Marathon Petroleum, Amoco, and Chevron.
Now we’re in the bright and promising future that is 1879.
James Duke decides to enter the cigarette business. Which was much less profitable than the shredded tobacco business Duke wanted at the time.
Two years after Duke starts W. Duke & Sons, James Bonsack invents a cigarette rolling machine. It produced over 200 cigarettes per minute, which was more than a great worker could produce in an hour. This effectively cut the production cost of cigarettes in half.
But there was a hitch.
People weren’t fond of machine-rolled cigarettes because they were all uniform. Which was stigmatized for its “lower quality.”
So most major rolled cigarette companies at the time rejected the machine immediately. Making smaller producers Bonsack’s only hope.
When Bonsack met Duke he was struggling to sell his invention. And Duke was struggling to make it off the ground. But Duke agreed to produce all his cigarettes with the machine if Bonsack would reduce his royalties from $.30 to $.20 per thousand cigarettes rolled.
Which turns out to be around $752 and $544 per thousand cigarettes, respectively. Which would make a pack of cigarettes $10.44 by today’s value. Just to break even. These numbers become important later.
But after his deal, Duke noticed that tobacco sales were declining. And not just his, everyone’s. His solution?
Turn his small tobacco company into a holding company through brute force.
Duke increased his advertising and cut his cigarette prices simultaneously. He managed to skate by on marginal profits. In the end, his tactic forced competitors to lower their prices. And once they hit an all-time low in profit, Duke had the cash and the leverage to swoop in and buy out his competitors.
At unreasonably low prices. All thanks to his deal with Bonsack.
By 1890, W. Duke & Sons held over 200 rival firms. Including Lucky Strike, Allen & Ginter, W.S. Kimball & Company, Kinney Tobacco, and Goodwin & Company. They collectively became American Tobacco and produced about 80% of the tobacco products in the US.
Once the dominant market share was under Duke’s reign, he began charging excessive amounts for cigarettes. But he also started claiming his cigarettes could cure everything from period cramps to asthma.
At which point, the US sought to dismantle his conglomerate.
In 1911, the Supreme Court ordered that American Tobacco be dissolved. On the same day they ordered that Standard Oil be dissolved, actually.
When Duke eventually dismantled his empire, it took nearly a year because the structure he created was massive and incredibly complex. It was nearly impossible to dissolve it without creating another monopoly.
Eventually, it was split into an Oligopoly between the existing American Tobacco Company and R. J. Reynolds as well as two new firms – Liggett & Myers and Lorillard
Other Sketchy Market Structures
Monopolies get the majority of the bad rap.
But they’re not the only ones you should be concerned about. There are several other market structures that can be just as destructive as a monopoly if left unchecked.
A monopsony is where there is only one buyer, versus a monopoly where there is only one supplier. In some ways, the power a monopsony has is similar to a monopoly.
But the market is buyer-driven. Which can be just as destructive as a supplier-driven one.
Real-Life Examples Of Monopsonies:
Traditionally, when we think of monopsonies, we think coal mining towns for a reason.
Back in the 1930s’, the majority of the workforce in Harlan County Kentucky worked in coal mines. The coal suppliers were the only “buyers” of the workforce – making them a monopsony.
The Great Depression was well underway at this point, and the coal mines were barely breaking even.
Though the majority of the country was still coal-dependent, their hold was slipping to oil and electricity. Their profits were going down both from the emerging markets as well as the economy. So the suppliers made what would prove to be a fatal decision.
In an effort to secure the US’ dependency on coal, they reduced the price of coal. But they cut workers’ wages by 10% to pay for it.
The workers were barely making a living working in the mines before the depression hit. Additionally, they’d been working underpaid in a dangerous occupation for years. Then they get a wage cut in the middle of one of the biggest economic crises in recent memory?
It didn’t take long before the tension hit a critical point.
In 1931 an eight-year war between coal workers, coal suppliers, and law enforcement broke out. Before it ended, countless people died from fights, bombings, and brutal executions.
By 1938, the war had stopped. But similar incidents broke out in the ’70s in the “Brookside Strike,” which involved coal companies as well.
While it might be easy to dismiss this as a phase of a dead and bygone era, I urge you to think about your local job economy before you do. Many small towns in America are predominantly employed by one large manufacturing company, mill, or – like coal – labor-heavy companies.
A duopoly is a type of oligopoly – which we’ll get to in a minute – where two massive firms dominate the market. The combined market control could go from 80% – 100%.
In this type of structure, the choices of individual consumers typically don’t affect either firm significantly – which makes it different from a monopoly. But it’s not necessarily outside the scope of a monopolistic competition if the products aren’t similar to one another.
Similar to a monopoly, the barrier of entry for new companies is exceptionally high.
Real-Life Examples Of Duopolies:
Duopolies are more common than you think. Here are a few you’ll recognize even if you’ve been living under a rock:
Smartphone OS: Apple (22%) and Android (76%) collectively hold 98% of the market share. Leaving 2% of consumers to fringe competitors like Microsoft.
Computer OS: Mac (10% – 13%) and Microsoft (77% – 88%) collectively hold roughly 92% of the market share for operating systems. Leaving 8% for competitors like Google (6%) and Linux (2%) to squeeze in.
Plastic Payments: you’re looking at Visa (60%) and Mastercard (30%), since they hold 90% of the market share. Fringe competitors like Discover and American Express are battling over the remaining 10% of market share.
Soda: Behemoths like Pepsi (42.9%) and Coke (43.2%) hold an almost-dead-even 86.1% market share. Most companies have been bought out by one of these companies, but a few “boutique” soda companies like Dr. Brown’s and Jones Soda are still holding out.
And, as a side-note, although Microsoft is in this duopoly category, they were ruled to have an illegal monopoly in 2001. It’s an entirely convoluted case, but the information is available online if you want to look into it.
Additionally, they fit within the confines of monopolistic competition. And, if Google’s rise in the computer OS market continues, they make move into an oligopoly.
An oligopoly is a market that’s dominated by a small number of large companies. While this sounds more comforting and idyllic than the market structures we’ve covered, it’s usually not.
Oligopolies are still dominated by massive companies and firms. They typically gain the majority of the market share through price wars, collusion, hostile takers, or mergers. Though, again, not always.
But in the cases where they do, it’s the consumer that suffers due to their ability to inflate prices at will.
Real-Life Oligopoly Examples:
Verizon, we meet again.
For your phone service, you have relatively few opinions. Verizon, Sprint, T-Mobile, and AT&T hold 98% of the market share. Additionally, abusive behavior has no recourse here. Contracts, hidden fees that they totally “don’t have”, surcharges, price hikes, and the like go without punishment.
Of course, pop-up services like Straight Talk and Spectrum offer you a contract-less opinion for month-to-month service. But their actual service comes from one of the four companies above.
The majority of the music you listen to comes from three massive record labels; Sony BMG, Universal Music Group, and Warner Music Group.
This list previously included EMI. That is, until Universal Music Group purchased EMI in 2012.
Industry watchdogs urged the government to intervene in this acquisition. And the government did eventually step in to look into their claims that the price of music could be grossly inflated by Universal Music Group.
But, ultimately, the merger was approved.
You have less in-air options than you think.
American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines control 80% of the market.
Prior to 1978, domestic air travel in the U.S. was managed by the Civil Aeronautics Board (CAB.) CAB controlled the price of tickets, schedules, and routes – among a few other things. The hope was that CAB would increase the competition within the domestic airline market.
However, with the addition of CAB, prices of tickets and options in airlines dropped. Additionally, tons of small airlines went out of business.
Since the loss of smaller airline options, prices in tickets have sharply increased since 2008. And they continue to be on the rise.
Legal Versus Illegal Company Operations
So. Basically all market structures seem to just screw the consumer. But there has to be something in place to protect us, right? To give us options?
Ugh. Kind of.
In order for agencies to shut down or dissolve a monopoly – or a company that pushes around consumers – it needs to do at least one of the following:
- Be anticompetitive: actively attempting to stifle their competition. So basically not being a good sport about it. But that usually only comes into play if they violate antitrust laws.
- Violate a federal antitrust act: there are quite a few of these documents. And they’re legal documents, so they’re intense and deserve their own post. These include the Sherman Antitrust Act, Clayton Antitrust Act, Federal Trade Commission Act, Lanham “Trademark” Act, and Robinson-Patman Act.
- Violate a state antitrust act: most of the time, state antitrust laws are more comprehensive than the federal laws, but not always.
In most antitrust acts, the big thing isn’t that you’re “too powerful” or that you’re abusing consumers, unfortunately. It’s that you can’t use any illegal tactics to gain your market power.
These tactics include things like price-fixing, hostile takeovers, and the like.
As we saw in American Steel, as long as the business came to power ethically, and isn’t doing anything that would harm the market or the consumer, they’re allowed to stay intact.
The hitch in this is what’s considered to be “harmful” to consumers. For example, cell phone companies, like we already covered, are allowed wanton abuse of power against consumers.