A monopoly is the exclusive control of one particular type of good or service by one entity. Usually, it refers to control by a corporation. Microsoft is a classic example of a monopoly. A related term is Oligopoly, in which a good or service is controlled by a small group of corporations.
Why is Monopoly harmful to society and to an economy?
Economists generally agree that monopoly is harmful. A monopoly undermines the free market economy, which is the basis for the success of capitalism. Oligopolies can be bad in the same ways, although in theory there may be some competition between them. Monopoly facilitates anti-competitive practices, which include:
- Price gouging - without any competition, a monopoly can raise prices extremely high and take huge profits, effectively siphoning money out of society like a parasite.
- Planned obsolescence - monopolies can sell products of inferior quality that break or degrade in performance after a short time, requiring the purchase of new products. This not only siphons money out of society like price gouging, but it drives consumption of resources and is thus highly damaging to sustainability.
- Destroying small competition through price undercutting - a monopoly can drive small competitors (including both small, local businesses, as well as small, specialized global businesses) out of business by undercutting their prices. Because the monopoly is bigger in size, it will almost always have larger cash reserves than a small competitor, and it will have sources of income from other profitable stores or divisions. The monopoly can thus operate at a loss until its competitor goes out of business. Sometimes the competitor is "bought out" -- effectively bribed in a deal that rewards the competitor with cash for closing sooner, so that the monopoly does not need to expend as many resources to force its competitor to close.
- Sabotage of compatibility with competitor's products - A monopoly can use interfaces or connectors with a complex design that makes it hard or impossible for other companies to manufacture products that work with the monopoly's products. In some cases, they even protect the design with patents. This can happen with software as well as with electronics and mechanical products. Microsoft has been found guilty of this sort of sabotage by the European Union, in what was then the biggest fine in EU history. [Source]
- Legal intimidation - A monopoly, because of its size, can strongarm or even destroy small competitors by making far-fetched legal threats. Because smaller competitors have fewer legal resources, the monopoly can issue legal threats that are a bit of a stretch, and sometimes, completely baseless. But because the small company does not have the resources to defend against the threat, they often settle a case or back down and give in to the larger company's demands. One area in which such threats are commonplace is in the area of software patents; large corporations typically acquire a portfolio of patents, often by buying them, and then search for targets that they can sue for patent infringement.
- Stagnation - Because monopolies are not subjected to competition, they are not forced to innovate in terms of developing new products, services, or technologies, nor are they forced to innovate their production process or streamline their business processes. The result is that monopolies can become bloated and wasteful, large, inefficient businesses with huge reserves of cash, yet inefficient use of resources internally.
Benefits of Monopoly:
Like most things in life or in economics, monopoly is not completely without downside. One advantage of a monopoly is standardization of certain products. This can remove problems with inter-operability or compatibility of technology. However, even without monopoly, standardization can be achieved by the formation of open standards, formed by third-party organizations or coalitions of competing businesses.
Monopoly can reduce or eliminate duplication of effort in an economy and in society as a whole. All businesses have a certain support structure, and this structure is duplicated in competitors. A monopoly gains some efficiency through economy of scale. This sort of gain is largest in areas such as utilities such as telephone or electric companies, where it is impractical to have competing businesses each with their own infrastructure.
Monopoly does also simplify the market. Choice is something that requires time and effort, and there is a cost associated with this choice: stores require more space on the shelf to carry competing products, and communities require more space to have competing stores. In cases where there is only enough demand for a single type of product or a single store of one type, monopoly might be a more natural and efficient state for things.
What Causes Monopoly?
Although sometimes a small or limited monopoly can arise naturally due to economic forces (for example, in a small town that could only support one general store), the most dangerous monopolies are large ones that arise from anti-competitive behaviour. Monopolies are to a large degree self-perpetuating, and the biggest answer to what causes monopoly is monopoly itself.
But monopolies and oligopolies have to start somewhere; they often acquire and solidify power through specific means, which include:
- Corporate Mergers & Buyouts
- Non-compete Agreements
- Formation of a Cartel - Close coordination with would-be competitors to allow a collection of independent agents to act as a monopoly
- Development or creation of a new technology or unique product, protected by patents or trade secrets.
- Making political contributions (or bribes) to influence lawmaking decisions in a way that gives them a monopoly, or gives them special treatment under the law in such a way that benefits them and/or harms their competitors.
Cazort.net believes that all anti-competetive behaviour is unethical because it undermines the success and integrity of a market economy. However, there can be a fine line between legitimate business innovation and anti-competitive behavior. One example is in the use of software patents to protect software innovations: companies legitimately use patents to protect their own innovations, but more frequently, large companies buy and sell patents, building portfolios of patents to sue (and thus shut out) smaller competitors.
Ways of curbing and preventing monopoly:
I think that one of the most effective ways of preventing monopoly is through educated consumer choice. In its early stages, the formation of monopoly can be prevented without the need for any legal intervention by the aggressive boycotting of any company engaging in anti-competitive practices. A truly sustainable culture would protect against monopoly through this method, without any need for government or legal intervention. Microsoft's monopoly is one of the main reason that I have exclusively used Linux and free software on both my person and business computers, since 2005. However, the culture in the United States is far from this ideal, and unfortunately, most people turn a blind eye while companies start consolidating power. Even when a company achieves a near total monopoly, people often remain unconcerned.
While I would like to see the culture of the United States change radically, to where monopoly is no longer seen as acceptable, I recognize that this change will take time. In an immediate practical sense, I support better enforcement of existing anti-trust legislation within the U.S., and would support stronger anti-trust legislation as well. I also think that reform of patent law could eliminate the abuse of patents as an anti-competitive practice. I would support a complete ban on software patents, but in the absence of this, I would support a stricter interpretation of the uniqueness requirement for making inventions patentable.
I also support natural methods to preventing monopoly, such as those reducing the incentive for monopoly formation, over regulatory and punitive methods which are not as effective. Some ideas for reducing monopoly include restructuring of the currency system, as well as restructuring corporate law, and the tax system.
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