The Formation and Regulation of Monopolies

Most of us, when we hear the word “monopoly,” we think of the classic board game, where

you go around the board and buy up as much real estate as possible.

This game is actually a great introduction to real monopolies.

But let’s now examine in more detail how they form, their potentially devastating effects,

and how governments attempt to stop them, though they also sometimes create them.

First, to review, a monopoly is when a single seller dominates a market.

This seller is also known as a monopolist.

While there are many ways monopolies can arise, they primarily do so when there are barriers

which prevent companies from entering a market that has a single supplier.

For example, let’s say there is just one pharmaceutical company that exclusively produces

a drug which can cure a deadly disease.

Another characteristic of a monopoly is that the product being sold is unique.

A drug that can prevent death from a deadly disease is certainly unique, but if the company

just sold a general anti-inflammatory drug instead, that is not, and other companies

could presumably produce an alternative to compete in that market.

The main problem with monopolies is that they can take advantage of their market power by

charging high prices.

In the case of the life saving drug, the price would likely be high due to the demand.

But if the one company that produced the drug could charge an unreasonably high price for

it, they likely would, as their goal is to maximize profits.

Not only that, but the monopolist may even be able to divide consumers into two or more

groups and charge a different price to each group.

This is known as price discrimination.

Monopolies can also cause a decline in the quality of goods and services as there is

no competition to put pressure on a company to increase or even maintain quality.

It’s not just consumers, either.

Monopolies can discourage entrepreneurship by preventing other companies from entering

a market.

And finally, monopolists may also be in a position to create a monopsony, which is when

a single buyer dominates a market.

In other words, a monopolist may be so powerful due to dominating one market as a seller,

that it can dominate other markets as a buyer.

So how do monopolies form?

Often it’s because one company becomes very powerful.

It does this by buying up intellectual property rights, buying up competition, hoarding a

scarce resource, or even a government giving it an exclusive right to sell something.

In the case of our fictional pharmaceutical company, perhaps it bought up the competition

and then lobbied for a law to be passed that would effectively make it impossible for competitors

to produce the very same drug.