TheInfoList

A monopoly (from
Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 million as of ...
el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by
Irving Fisher Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concep ...
, a market with the "absence of competition", creating a situation where a specific person or
enterprise Enterprise (or the archaic spelling Enterprize) may refer to: Business and economics Brands and enterprises * Enterprise GP Holdings Enterprise GP Holdings was a midstream energy holding company based in Houston, Texas Houston ( ) is ...

is the only supplier of a particular thing. This contrasts with a
monopsony In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The Microeconomics, microeconomic theory of monopsony assumes a ...
which relates to a single entity's control of a
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
to purchase a good or service, and with
oligopoly An oligopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mi ...
and
duopoly A duopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mill ...
which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic
competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a riv ...
to produce the
good 125px, In many Western religions, angels are considered to be good beings and are contrasted with devils who are considered evil In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice betwee ...
or
service Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of university faculty * Civil service The civil service is a collective term for a sector of gove ...
, a lack of viable
substitute good In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study of ind ...
s, and the possibility of a high
monopoly priceA monopoly price is set by a seller with market power; that is, a seller who can drive up the price by reducing the quantity he sells, as opposed to "perfect competition", under which sellers simply take the market price as given.Roger LeRoy Miller, ...
well above the seller's
marginal cost In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...

monopoly profitIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
. The verb ''monopolise'' or ''monopolize'' refers to the ''process'' by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market). A monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a
cartel A cartel is a group of independent market participants who Collusion, collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of r ...

(a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have
market power In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market. Monopolies can be established by a government, form , or form by integration. In many jurisdictions,
competition law Competition law is a that promotes or seeks to maintain by regulating conduct by companies. Competition law is implemented through public and private enforcement. It is also known as ''anti- law'' in China and Russia. In previous years it has ...
s restrict monopolies due to government concerns over potential adverse effects. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant. A
government-granted monopoly In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
or ''legal monopoly'', by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic
interest group Advocacy groups, also known as special interest groups, use various forms of advocacy Advocacy is an activity by an individual or group that aims to influence decisions within political, economic, and social institutions. Advocacy include ...
.
Patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of years in exchange for publishing an sufficiency of disclosure, enabling disclo ...

s,
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more ...

s, and
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual pr ...

s are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a
government monopoly In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, for example with a
state-owned company A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simp ...
. Monopolies may be occurring due to limited competition because the industry is resource intensive and requires substantial
costs In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...
to operate (e.g., certain railroad systems).

Market structures

In economics, the idea of monopolies is important in the study of management structures, which directly concerns normative aspects of economic competition, and provides the basis for topics such as
industrial organization In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societie ...
and
economics of regulation Regulatory economics is the economics of regulation. It is the application of law by government or independent administrative agencies for various purposes, including remedying market failure, Environmental law, protecting the environment, and econo ...
. There are four basic types of market structures in traditional economic analysis:
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
,
monopolistic competition Image:Long-run equilibrium of the firm under monopolistic competition.JPG, 300px, Long-run equilibrium of the firm under monopolistic competition. The firm still produces where marginal cost and marginal revenue are equal; however, the demand cur ...
, oligopoly and monopoly. A monopoly is a structure in which a single supplier produces and sells a given product or service. If there is a single seller in a certain market and there are no close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed "monopolistic competition", whereas in an
oligopoly An oligopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mi ...
, the companies interact strategically. In general, the main results from this theory compare the price-fixing methods across market structures, analyze the effect of a certain structure on welfare, and vary technological or demand assumptions in order to assess the consequences for an abstract model of society. Most economic textbooks follow the practice of carefully explaining the "perfect competition" model, mainly because this helps to understand departures from it (the so-called "imperfect competition" models). The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis. In a general equilibrium context, a
good 125px, In many Western religions, angels are considered to be good beings and are contrasted with devils who are considered evil In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice betwee ...

is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, allowing for more flexibility in the identification of substitute goods.

Characteristics

A monopoly has at least one of these five characteristics: * ''Profit maximizer'': Maximizes profits. * ''Price maker'': Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm. * ''High barriers to entry'': Other sellers are unable to enter the market of the monopoly. * ''Single seller'': In a monopoly, there is one seller of the good, who produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. * ''
Price discrimination Price discrimination is a microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted b ...
'': A monopolist can change the price or quantity of the product. They sell higher quantities at a lower price in a very market, and sell lower quantities at a higher price in a less elastic market.

Sources of monopoly power

Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry: economic, legal and deliberate. * ''Economic barriers'': Economic barriers include
economies of scale 330px, As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. LRAC is the long-run average cost In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their sca ...

, capital requirements, cost advantages and technological superiority. * ''Economies of scale'': Decreasing unit costs for larger volumes of production. Decreasing costs coupled with large initial costs, If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, and so cannot produce at an average cost that is competitive with the dominant company. And if the long-term average cost of the dominant company is constantly decreasing, then that company will continue to have the least cost method to provide a good or service. * ''Capital requirements'': Production processes that require large investments of capital, perhaps in the form of large research and development costs or substantial
sunk costs In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, limit the number of companies in an industry: this is an example of economies of scale. * ''Technological superiority'': A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants either do not have the expertise or are unable to meet the large fixed costs (see above) needed for the most efficient technology. Thus one large company can often produce goods cheaper than several small companies. * ''No substitute goods'': A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for that good relatively inelastic, enabling monopolies to extract positive profits. * ''Control of natural resources'': A prime source of monopoly power is the control of resources (such as raw materials) that are critical to the production of a final good. * ''Network externalities'': The use of a product by a person can affect the value of that product to other people. This is the
network effect Image:Metcalfe-Network-Effect.svg, Diagram illustrating the network effect in a few simple phone networks. The lines represent potential calls between phones. As the number of phones connected to the network grows, the number of potential calls avai ...

. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words, the more people who are using a product, the greater the probability that another individual will start to use the product. This reflects fads, fashion trends, social networks etc. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft office suite and operating system in personal computers. * ''Legal barriers'': Legal rights can provide opportunity to monopolise the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good. * Advertising: Advertising is most important to sell the product because of the single user, they have to do it their own. * ''Manipulation'': A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see
anti-competitive practices Anti-competitive practices are business or government practices that unlawfully prevent or reduce competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry ...
). In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. High liquidation costs are a primary barrier to exiting. Market exit and shutdown are sometimes separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.

Monopoly versus competitive markets

While monopoly and perfect competition mark the extremes of market structuresPng (1999), p. 268. there is some similarity. The cost functions are the same. Both monopolies and perfectly competitive (PC) companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the most important distinctions are as follows: * ''Marginal revenue and price'': In a perfectly competitive market, price equals marginal cost. In a monopolistic market, however, price is set above marginal cost. The price equal marginal revenue in this case. * ''Product differentiation'': There is no product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question. A customer either buys from the monopolizing entity on its terms or does without. * ''Number of competitors'': PC markets are populated by an infinite number of buyers and sellers. A monopoly involves a single seller. * ''Barriers to entry'': Barriers to entry are factors and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, or exit competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market * ''Elasticity of demand'': The price elasticity of demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite. * ''Excess profits'': Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors, which can enter the market freely and decrease prices, eventually reducing excess profits to zero. A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market. * ''Profit maximization'': A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs. The rules are not equivalent. The demand curve for a PC company is perfectly elastic – flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P. * ''P-Max quantity, price and profit'': If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, incur deadweight loss, and realise positive economic profits. * ''Supply curve'': in a perfectly competitive market there is a well defined supply function with a one-to-one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short-term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note, a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both". Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply "curve" would be the price-quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply "point" would be established. The locus of these points would not be a supply curve in any conventional sense. The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company. Practically all the variations mentioned above relate to this fact. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve. Assume that the inverse demand curve is of the form x = a − by. Then the total revenue curve is TR = ay − by2 and the marginal revenue curve is thus MR = a − 2by. From this several things are evident. First, the marginal revenue curve has the same y intercept as the inverse demand curve. Second, the slope of the marginal revenue curve is twice that of the inverse demand curve. Third, the x intercept of the marginal revenue curve is half that of the inverse demand curve. What is not quite so evident is that the marginal revenue curve is below the inverse demand curve at all points. Since all companies maximise profits by equating MR and MC it must be the case that at the profit-maximizing quantity MR and MC are less than price, which further implies that a monopoly produces less quantity at a higher price than if the market were perfectly competitive. The fact that a monopoly has a downward-sloping demand curve means that the relationship between total revenue and output for a monopoly is much different than that of competitive companies.Frank (2009), p. 377. Total revenue equals price times quantity. A competitive company has a perfectly elastic demand curve meaning that total revenue is proportional to output. Thus the total revenue curve for a competitive company is a ray with a slope equal to the market price. A competitive company can sell all the output it desires at the market price. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero. Total revenue has its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and price occur when MR = 0. For example, assume that the monopoly's demand function is P = 50 − 2Q. The total revenue function would be TR = 50Q − 2Q2 and marginal revenue would be 50 − 4Q. Setting marginal revenue equal to zero we have : $50-4Q=0$ : $-4Q=-50$ : $Q = 12.5$ So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue maximizing price is 25. A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition. If a company increases prices too much, then others may enter the market if they are able to provide the same good, or a substitute, at a lesser price. The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory". A monopolist can extract only one premium, and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs. A pure monopoly has the same economic rationality of perfectly competitive companies, i.e. to optimise a profit function given some constraints. By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the
marginal cost In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...

and
marginal revenue Marginal revenue (or marginal benefit) is a central concept in microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities wor ...
of production. Nonetheless, a pure monopoly can – unlike a competitive company – alter the market price for its own convenience: a decrease of production results in a higher price. In the economics' jargon, it is said that pure monopolies have "a downward-sloping demand". An important consequence of such behaviour is that typically a monopoly selects a higher price and lesser quantity of output than a price-taking company; again, less is available at a higher price.

Inverse elasticity rule

A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule (as measured by the
Lerner index The Lerner index, formalized in 1934 by British economist of Russian origin Abba Lerner Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born British economist. Biography Born in Bessara ...
) can be expressed as $\frac = \frac$, where $E_d$ is the price elasticity of demand the firm faces.Tirole, p. 66. The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand. The implication of the rule is that the more elastic the demand for the product the less
pricing power In economics, market power refers to the ability of a theory of the firm, firm to influence the price at which it sells a product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elast ...
the monopoly has.

Market power

Market power is the ability to increase the product's price above marginal cost without losing all customers. Perfectly competitive (PC) companies have zero market power when it comes to setting prices. All companies of a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual companies simply take the price determined by the market and produce that quantity of output that maximizes the company's profits. If a PC company attempted to increase prices above the market level all its customers would abandon the company and purchase at the market price from other companies. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both. A monopoly is a price maker. The monopoly is the market and prices are set by the monopolist based on their circumstances and not the interaction of demand and supply. The two primary factors determining monopoly market power are the company's demand curve and its cost structure. Market power is the ability to affect the terms and conditions of exchange so that the price of a product is set by a single company (price is not imposed by the market as in perfect competition). Although a monopoly's market power is great it is still limited by the demand side of the market. A monopoly has a negatively sloped demand curve, not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers.

Price discrimination

Price discrimination Price discrimination is a microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted b ...
allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more. For example, most economic textbooks cost more in the United States than in
developing countries 450px, Example of Older Classifications by the IMF and the United Nations, UN from 2008 A developing country is a country with a less developed industrial base and a low Human Development Index (HDI) relative to other countries. However, ...

like
Ethiopia Ethiopia, officially the Federal Democratic Republic of Ethiopia, is a landlocked country A landlocked country is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the ...

. In this case, the publisher is using its government-granted
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more ...

monopoly to price discriminate between the generally wealthier American economics students and the generally poorer Ethiopian economics students. Similarly, most
patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

ed medications cost more in the U.S. than in other countries with a (presumed) poorer customer base. Typically, a high general price is listed, and various market segments get varying discounts. This is an example of framing to make the process of charging some people higher prices more socially acceptable. Perfect price discrimination would allow the monopolist to charge each customer the exact maximum amount they would be willing to pay. This would allow the monopolist to extract all the
consumer surplus In mainstream economics, economic surplus, also known as total welfare or Marshallian surplus (after Alfred Marshall), refers to two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain obtained by consumers because ...
of the market. A domestic example would be the cost of airplane flights in relation to their takeoff time; the closer they are to flight, the higher the plane tickets will cost, discriminating against late planners and often business flyers. While such perfect price discrimination is a theoretical construct, advances in information technology and
micromarketing Micromarketing was first referred to in the UK marketing press in November 1988 in respect of the application of geodemographics to consumer marketing. The subject of micromarketing was developed further in an article in February 1990, which empha ...
may bring it closer to the realm of possibility. Partial price discrimination can cause some customers who are inappropriately pooled with high price customers to be excluded from the market. For example, a poor student in the U.S. might be excluded from purchasing an economics textbook at the U.S. price, which the student may have been able to purchase at the Ethiopian price. Similarly, a wealthy student in Ethiopia may be able to or willing to buy at the U.S. price, though naturally would hide such a fact from the monopolist so as to pay the reduced third world price. These are deadweight losses and decrease a monopolist's profits. Deadweight loss is considered detrimental to society and market participation. As such, monopolists have substantial economic interest in improving their market information and ''market segmenting''. There is important information for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lesser, than a competitive company follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in
price discrimination Price discrimination is a microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted b ...
(this is termed first degree price discrimination, such that all customers are charged the same amount). If the monopoly were permitted to charge individualised prices (this is termed third degree price discrimination), the quantity produced, and the price charged to the ''marginal'' customer, would be identical to that of a competitive company, thus eliminating the
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
; however, all
gains from tradeIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
(social welfare) would accrue to the monopolist and none to the consumer. In essence, every consumer would be indifferent between going completely without the product or service and being able to purchase it from the monopolist. As long as the
price elasticity of demand A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...

for most customers is less than one in
absolute value In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities an ...

, it is advantageous for a company to increase its prices: it receives more money for fewer goods. With a price increase, price elasticity tends to increase, and in the optimum case above it will be greater than one for most customers. A company maximizes profit by selling where marginal revenue equals marginal cost. A company that does not engage in price discrimination will charge the profit maximizing price, P*, to all its customers. In such circumstances there are customers who would be willing to pay a higher price than P* and those who will not pay P* but would buy at a lower price. A price discrimination strategy is to charge less price sensitive buyers a higher price and the more price sensitive buyers a lower price. Thus additional revenue is generated from two sources. The basic problem is to identify customers by their willingness to pay. The purpose of price discrimination is to transfer consumer surplus to the producer.Boyes and Melvin, p. 246. Consumer surplus is the difference between the value of a good to a consumer and the price the consumer must pay in the market to purchase it. Price discrimination is not limited to monopolies. Market power is a company's ability to increase prices without losing all its customers. Any company that has market power can engage in price discrimination. Perfect competition is the only market form in which price discrimination would be impossible (a perfectly competitive company has a perfectly elastic demand curve and has no market power).Perloff (2009), p. 394.Besanko and Beautigam (2005), p. 449. There are three forms of price discrimination. First degree price discrimination charges each consumer the maximum price the consumer is willing to pay. Second degree price discrimination involves quantity discounts. Third degree price discrimination involves grouping consumers according to willingness to pay as measured by their price elasticities of demand and charging each group a different price. Third degree price discrimination is the most prevalent type. There are three conditions that must be present for a company to engage in successful price discrimination. First, the company must have market power.Boyes and Melvin, p. 449. Second, the company must be able to sort customers according to their willingness to pay for the good. Third, the firm must be able to prevent resell. A company must have some degree of market power to practice price discrimination. Without market power a company cannot charge more than the market price.Perloff (2009), p. 393. Any market structure characterized by a downward sloping demand curve has market power – monopoly, monopolistic competition and oligopoly. The only market structure that has no market power is perfect competition. A company wishing to practice price discrimination must be able to prevent middlemen or brokers from acquiring the consumer surplus for themselves. The company accomplishes this by preventing or limiting resale. Many methods are used to prevent resale. For instance, persons are required to show photographic identification and a boarding pass before boarding an airplane. Most travelers assume that this practice is strictly a matter of security. However, a primary purpose in requesting photographic identification is to confirm that the ticket purchaser is the person about to board the airplane and not someone who has repurchased the ticket from a discount buyer. The inability to prevent resale is the largest obstacle to successful price discrimination. Companies have however developed numerous methods to prevent resale. For example, universities require that students show identification before entering sporting events. Governments may make it illegal to resell tickets or products. In Boston,
Red Sox The Boston Red Sox are an American professional baseball team based in Boston. The Red Sox compete in Major League Baseball (MLB) as a member club of the American League (AL) American League East, East division. Founded in as one of the Amer ...
baseball tickets can only be resold legally to the team. The three basic forms of price discrimination are first, second and third degree price discrimination. In ''first degree price discrimination'' the company charges the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Thus for each unit the seller tries to set the price equal to the consumer's reservation price. Direct information about a consumer's willingness to pay is rarely available. Sellers tend to rely on secondary information such as where a person lives (postal codes); for example, catalog retailers can use mail high-priced catalogs to high-income postal codes. First degree price discrimination most frequently occurs in regard to professional services or in transactions involving direct buyer-seller negotiations. For example, an accountant who has prepared a consumer's tax return has information that can be used to charge customers based on an estimate of their ability to pay. In ''second degree price discrimination'' or quantity discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought. The theory of second degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a given price. Companies know that consumer's willingness to buy decreases as more units are purchased. The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer. For example, sell in unit blocks rather than individual units. In ''third degree price discrimination'' or multi-market price discrimination the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand. Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve. The firm then attempts to maximize profits in each segment by equating MR and MC, Generally the company charges a higher price to the group with a more price inelastic demand and a relatively lesser price to the group with a more elastic demand. Examples of third degree price discrimination abound. Airlines charge higher prices to business travelers than to vacation travelers. The reasoning is that the demand curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is relatively inelastic. Any determinant of price elasticity of demand can be used to segment markets. For example, seniors have a more elastic demand for movies than do young adults because they generally have more free time. Thus theaters will offer discount tickets to seniors.

Example

Assume that by a uniform pricing system the monopolist would sell five units at a price of $10 per unit. Assume that his marginal cost is$5 per unit. Total revenue would be $50, total costs would be$25 and profits would be $25. If the monopolist practiced price discrimination he would sell the first unit for$50 the second unit for $40 and so on. Total revenue would be$150, his total cost would be $25 and his profit would be$125.00.Lovell (2004), p. 266. Several things are worth noting. The monopolist acquires all the consumer surplus and eliminates practically all the deadweight loss because he is willing to sell to anyone who is willing to pay at least the marginal cost. Thus the price discrimination promotes efficiency. Secondly, by the pricing scheme price = average revenue and equals marginal revenue. That is the monopolist behaving like a perfectly competitive company.Frank (2008), p. 394. Thirdly, the discriminating monopolist produces a larger quantity than the monopolist operating by a uniform pricing scheme.Frank (2008), p. 266.

Classifying customers

Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking consumers directly is fruitless: consumers don't know, and to the extent they do they are reluctant to share that information with marketers. The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions. As noted information about where a person lives (postal codes), how the person dresses, what kind of car he or she drives, occupation, and income and spending patterns can be helpful in classifying.

Monopoly and efficiency

According to the standard model, in which a monopolist sets a single price for all consumers, the monopolist will sell a lesser quantity of goods at a higher price than would companies by
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its price, monopoly pricing creates a
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
referring to potential gains that went neither to the monopolist nor to consumers. Deadweight loss is the cost to society because the market isn't in equilibrium, it is inefficient. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition. Where efficiency is defined by the total gains from trade, the monopoly setting is less efficient than perfect competition. It is often argued that monopolies tend to become less efficient and less innovative over time, becoming "complacent", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave ''as if'' there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's
barriers to entry In theories of competition Competition arises whenever two or more parties strive for a common goal A goal is an idea of the future or desired result that a person or a group of people envision, Planning, plan and commit to achieve. Peop ...
are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a
canal Canals are waterways channels Channel, channels, channeling, etc., may refer to: Geography * Channel (geography), in physical geography, a landform consisting of the outline (banks) of the path of a narrow body of water. Australia * ...

monopoly, while worth a great deal during the late 18th century United Kingdom, was worth much less during the late 19th century because of the introduction of railways as a substitute. Contrary to
common misconception This is a list of common misconceptions. Each entry is worded as a correction; the misconceptions themselves are implied rather than stated. These entries are concise summaries of the main subject articles, which can be consulted for more detai ...
, monopolists do not try to sell items for the highest possible price, nor do they try to maximize profit per unit, but rather they try to maximize total profit.

Natural monopoly

A natural monopoly is an organization that experiences
increasing returns to scale In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...

over the relevant range of output and relatively high fixed costs. A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve. When this situation occurs, it is always more efficient for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. Often, a natural monopoly is the outcome of an initial rivalry between several competitors. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices. Natural monopolies are synonymous with what is called "single-unit enterprise," a term which was used in the 1914 book ''Social Economics'' written by Friedrich von Wieser. As mentioned, government regulations are frequently used with natural monopolies to help control prices. An example that can illustrate this can be found when looking at the United States Postal Service, which has a monopoly over types of mail. According to Wieser, the idea of a competitive market within the postal industry would lead to extreme prices and unnecessary spending, and this highlighted why government regulation in the form of price control is necessary as it helped efficient market. To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.Samuelson and Marks (2003), p. 100. This pricing scheme eliminates any positive economic profits since price equals average cost. Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies. Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market). In 1848, J.S. Mill was the first individual to describe monopolies with the adjective "natural". He used it interchangeably with "practical". At the time, Mill gave the following examples of natural or practical monopolies: gas supply, water supply, roads, canals, and railways. In his ''Social Economics'', Friedrich von Wieser demonstrated his view of the postal service as a natural monopoly: "In the face of
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single-unit administration, the principle of competition becomes utterly abortive. The parallel network of another postal organization, beside the one already functioning, would be economically absurd; enormous amounts of money for plant and management would have to be expended for no purpose whatever." Overall, most monopolies are man-made monopolies, or unnatural monopolies, not natural ones.

Government-granted monopoly

A government-granted monopoly (also called a "''
de jure In law and government, ''de jure'' ( ; , "by law") describes practices that are legally recognized, regardless of whether the practice exists in reality. In contrast, ("in fact") describes situations that exist in reality, even if not legally ...
'' monopoly") is a form of ''
coercive monopoly Coercion () is compelling a party to act in an involuntary manner by use of threat A threat is a ''communicated'' intent to inflict harm or loss on another person. Intimidation is widely observed in animal behavior (particularly in a rituali ...
'', in which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity. Monopoly may be granted explicitly, as when potential competitors are excluded from the market by a specific
law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its bounda ...
, or implicitly, such as when the requirements of an administrative
regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's global climate, organisms, the human brain, infras ...
can only be fulfilled by a single market player, or through some other legal or procedural mechanism, such as
patents A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...
,
trademarks A trademark (also written trade mark or trade-markThe styling of ''trademark'' as a single word is predominantly used in the United States and Philippines only, while the two-word styling ''trade mark'' is used in many other countries around ...
, and
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more ...

. These monopolies can also be the result of "rent-seeking" behavior, where firms will try to get the prize of having a monopoly, and the increase of profits in acquiring one from a competitive market in their sector.

Monopolist shutdown rule

A monopolist should shut down when price is less than average variable cost for every output level – in other words where the demand curve is entirely below the average variable cost curve. Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term.

Breaking up monopolies

In an unregulated market, monopolies can potentially be ended by new competition, breakaway businesses, or consumers seeking alternatives. In a regulated market, a government will often either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it (see Antitrust law and trust busting).
Public utilities A public utility company (usually just utility) is an organization that maintains the infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a ...
, often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned.
American Telephone & Telegraph AT&T Corporation, originally the American Telephone and Telegraph Company, is the subsidiary of AT&T, AT&T Inc. that provides voice, video, data, and Internet telecommunications and professional services to businesses, consumers, and government ...
(AT&T) and
Standard Oil Standard Oil Co. was an American -producing, transporting, refining, and marketing . Established in 1870 by and as a in , it was the largest in the world at its height. Its history as one of the world's first and largest s ended in 1911, wh ...

are often cited as examples of the breakup of a private monopoly by government. The
Bell System The Bell System was the system of companies, led by the Bell Telephone Company The Bell Telephone Company, a common law joint stock company, was organized in Boston, Massachusetts on July 9, 1877, by Alexander Graham Bell's father-in-law Ga ...
, later AT&T, was protected from competition first by the
Kingsbury CommitmentThe Kingsbury Commitment is a 1913 out-of-court settlement of the United States government's antitrust challenge against the American Telephone and Telegraph Company (AT&T) for AT&T's then-growing vertical monopoly in the telephone industry. In ret ...
, and later by a series of agreements between AT&T and the Federal Government. In 1984, decades after having been granted monopoly power by force of law, AT&T was broken up into various components, MCI,
Sprint Sprint may refer to: Aerospace *Spring WS202 Sprint, a Canadian aircraft design *Sprint (missile), an anti-ballistic missile Automotive and motorcycle *Alfa Romeo Sprint, automobile produced by Alfa Romeo between 1976 and 1989 *Chevrolet Sprint, ...
, who were able to compete effectively in the long-distance phone market. These breakups are due to the presence of deadweight loss and inefficiency in a monopolistic market, causing the Government to intervene on behalf of consumers and society in order to incite competition. While the sentiment among regulators and judges has generally recommended that breakups are not as remedies for antitrust enforcement, recent scholarship has found that this hostility to breakups by administrators is largely unwarranted. In fact, some scholars have argued breakups, even if incorrectly targeted, could arguably still encourage collaboration, innovation, and efficiency.

Law

The law regulating dominance in the European Union is governed by Article 102 of the ''
Treaty on the Functioning of the European Union A treaty is a formal, legally binding written agreement between actors in international law. It is usually entered into by sovereign states and international organizations, but can sometimes include individuals, business entities, and other ...
'' which aims at enhancing the consumer's welfare and also the efficiency of allocation of resources by protecting competition on the downstream market. The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share company's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices (i.e. pricing high just because it is the only one around.) It may also be noted that it is illegal to try to obtain a monopoly, by practices of buying out the competition, or equal practices. If one occurs naturally, such as a competitor going out of business, or lack of competition, it is not illegal until such time as the monopoly holder abuses the power.

Establishing dominance

First it is necessary to determine whether a company is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer". Establishing dominance is a two-stage test. The first thing to consider is market definition which is one of the crucial factors of the test. It includes relevant product market and relevant geographic market.

Relevant product market

As the definition of the market is of a matter of interchangeability, if the goods or services are regarded as interchangeable then they are within the same product market. For example, in the case of ''United Brands v Commission'', it was argued in this case that bananas and other fresh fruit were in the same product market and later on dominance was found because the special features of the banana made it could only be interchangeable with other fresh fruits in a limited extent and other and is only exposed to their competition in a way that is hardly perceptible. The demand substitutability of the goods and services will help in defining the product market and it can be access by the ‘hypothetical monopolist’ test or the ‘SSNIP’ test .

Relevant geographic market

It is necessary to define it because some goods can only be supplied within a narrow area due to technical, practical or legal reasons and this may help to indicate which undertakings impose a competitive constraint on the other undertakings in question. Since some goods are too expensive to transport where it might not be economic to sell them to distant markets in relation to their value, therefore the cost of transporting is a crucial factor here. Other factors might be legal controls which restricts an undertaking in a Member States from exporting goods or services to another. Market definition may be difficult to measure but is important because if it is defined too broadly, the undertaking may be more likely to be found dominant and if it is defined too narrowly, the less likely that it will be found dominant.

Market shares

As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold. It does not in itself determine whether an undertaking is dominant but work as an indicator of the states of the existing competition within the market. The Herfindahl-Hirschman Index (HHI) is sometimes used to assess how competitive an industry is. It sums up the squares of the individual market shares of all of the competitors within the market. The lower the total, the less concentrated the market and the higher the total, the more concentrated the market.Whish R and others, ''Competition Law'' (8th Edition, OUP 2015) In the US, the merger guidelines state that a post-merger HHI below 1000 is viewed as not concentrated while HHIs above that will provoke further review. By European Union law, very large market shares raise a presumption that a company is dominant, which may be rebuttable. A market share of 100% may be very rare but it is still possible to be found and in fact it has been identified in some cases, for instance the ''AAMS v Commission'' case. Undertakings possessing market share that is lower than 100% but over 90% had also been found dominant, for example, Microsoft v Commission case. In the AKZO v Commission case, the undertaking is presumed to be dominant if it has a market share of 50%. There are also findings of dominance that are below a market share of 50%, for instance, United Brands v Commission, it only possessed a market share of 40% to 45% and still to be found dominant with other factors. The lowest yet market share of a company considered "dominant" in the EU was 39.7%.If a company has a dominant position, then there is a special responsibility not to allow its conduct to impair competition on the common market however these will all falls away if it is not dominant. When considering whether an undertaking is dominant, it involves a combination of factors. Each of them cannot be taken separately as if they are, they will not be as determinative as they are when they are combined.Guidance on Article 102 Enforcement Priorities 009/ref> Also, in cases where an undertaking has previously been found dominant, it is still necessary to redefine the market and make a whole new analysis of the conditions of competition based on the available evidence at the appropriate time.

Other related factors

According to the Guidance, there are three more issues that must be examined. They are actual competitors that relates to the market position of the dominant undertaking and its competitors, potential competitors that concerns the expansion and entry and lastly the countervailing buyer power. * Actual Competitors Market share may be a valuable source of information regarding the market structure and the market position when it comes to accessing it. The dynamics of the market and the extent to which the goods and services differentiated are relevant in this area. * Potential Competitors It concerns with the competition that would come from other undertakings which are not yet operating in the market but will enter it in the future. So, market shares may not be useful in accessing the competitive pressure that is exerted on an undertaking in this area. The potential entry by new firms and expansions by an undertaking must be taken into account, therefore the barriers to entry and barriers to expansion is an important factor here. * Countervailing buyer power Competitive constraints may not always come from actual or potential competitors. Sometimes, it may also come from powerful customers who have sufficient bargaining strength which come from its size or its commercial significance for a dominant firm.

Types of abuses

There are three main types of abuses which are exploitative abuse, exclusionary abuse and single market abuse. * Exploitative abuse It arises when a monopolist has such significant market power that it can restrict its output while increasing the price above the competitive level without losing customers. This type is less concerned by the Commission than other types. * Exclusionary abuse This is most concerned about by the Commissions because it is capable of causing long- term consumer damage and is more likely to prevent the development of competition. An example of it is exclusive dealing agreements. * Single market abuse It arises when a dominant undertaking carrying out excess pricing which would not only have an exploitative effect but also prevent parallel imports and limits intra- brand competition.

Examples of abuses

* Limiting supply *
Predatory pricing Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant Domination or dominant may refer to: Society * World domination, which is mainly a conspiracy theory * Colonialism in which one group ( ...
or undercutting *
Price discrimination Price discrimination is a microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted b ...
*
Refusal to deal Though in general, each business may decide with whom they wish to transact, there are some situations when a refusal to deal may be considered an unlawful anti-competitive practice Anti-competitive practices are business or government practices ...
and
exclusive dealing In Law and economics, Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include ...
*
Tying (commerce) Tying (informally, product tying) is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. In legal terms, a ''tying sale'' makes the sale of one good 175px, In many religions, ...
and
product bundling In marketing Marketing is the process of intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasize in advertising; ...
Despite wide agreement that the above constitute abusive practices, there is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct. Furthermore, there has been some consideration of what happens when a company merely attempts to abuse its dominant position. To provide a more specific example, economic and philosophical scholar Adam Smith cites that trade to the East India Company has, for the most part, been subjected to an exclusive company such as that of the English or Dutch. Monopolies such as these are generally established against the nation in which they arose out of. The profound economist goes on to state how there are two types of monopolies. The first type of monopoly is one which tends to always attract to the particular trade where the monopoly was conceived, a greater proportion of the stock of the society than what would go to that trade originally. The second type of monopoly tends to occasionally attract stock towards the particular trade where it was conceived, and sometimes repel it from that trade depending on varying circumstances. Rich countries tended to repel while poorer countries were attracted to this. For example, The Dutch company would dispose of any excess goods not taken to the market in order to preserve their monopoly while the English sold more goods for better prices. Both of these tendencies were extremely destructive as can be seen in Adam Smith's writings.

Historical monopolies

Origin

The term "monopoly" first appears in
Aristotle Aristotle (; grc-gre, Ἀριστοτέλης ''Aristotélēs'', ; 384–322 BC) was a Greek philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questio ...

's ''Politics''. Aristotle describes
Thales of Miletus Thales of Miletus ( ; el, Θαλῆς Thales of Miletus ( ; el, Θαλῆς (ὁ Μιλήσιος), ''Thalēs''; ) was a Greek mathematician A mathematician is someone who uses an extensive knowledge of mathematics Mathematics (fr ...

's cornering of the market in olive presses as a monopoly (''μονοπώλιον''). Another early reference to the concept of “monopoly” in a commercial sense appears in tractate Demai of the
Mishna The Mishnah or the Mishna (; he, מִשְׁנָה, "study by repetition", from the verb ''shanah'' , or "to study and review", also "secondary") is the first major written collection of the Jewish s which is known as the . It is also the first ma ...
(2nd century C.E.), regarding the purchasing of agricultural goods from a dealer who has a monopoly on the produce (chapter 5; 4). The meaning and understanding of the English word 'monopoly' has changed over the years.

Monopolies of resources

Salt

Vending of common salt (
sodium chloride Sodium chloride , commonly known as salt (although sea salt also contains other chemical salt (chemistry), salts), is an ionic compound with the chemical formula NaCl, representing a 1:1 ratio of sodium and chloride ions. With Molar mass, molar ...
) was historically a natural monopoly. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for producing salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "
famine A famine is a widespread scarcity of food Food is any substance consumed to provide nutritional support for an organism In biology, an organism (from Ancient Greek, Greek: ὀργανισμός, ''organismos'') is any individual con ...

s" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (e.g. the
Sahara desert The Sahara (, ; ar, الصحراء الكبرى, ', 'the Greatest Desert') is a desert on the . With an area of , it is the largest hot in the world and the third largest desert overall, smaller only than the deserts of and the northern . ...

) requiring well-organised security for transport, storage, and distribution. The Salt Commission was a legal monopoly in China. Formed in 758, the Commission controlled salt production and sales in order to raise
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
revenue for the
Tang Dynasty The Tang dynasty (, ; ), or Tang Empire, was an imperial dynasty of China that ruled from 618 to 907, with an interregnum An interregnum (plural interregna or interregnums) is a period of discontinuity or "gap" in a government, organiza ...
. The "
Gabelle The ''gabelle'' () was a very unpopular tax on salt in France that was established during the mid-14th century and lasted, with brief lapses and revisions, until 1946. The term ''gabelle'' is derived from the Italian ''gabella'' (a duty), itself ...
" was a notoriously high tax levied upon salt in the
Kingdom of France The Kingdom of France ( fro, Reaume de France; frm, Royaulme de France; french: link=yes, Royaume de France) is the historiographical name or Hyponymy and hypernymy, umbrella term given to various political entities of France in the Middle Ages ...
. The much-hated levy had a role in the beginning of the
French Revolution The French Revolution ( ) was a period of radical political and societal change in France France (), officially the French Republic (french: link=no, République française), is a spanning and in the and the , and s. Its ...

, when strict legal controls specified who was allowed to sell and distribute salt. First instituted in 1286, the Gabelle was not permanently abolished until 1945.

Coal

Robin Gollan argues in ''The Coalminers of New South Wales'' that anti-competitive practices developed in the coal industry of Australia's
NewcastleNewcastle usually refers to either: *Newcastle upon Tyne Newcastle upon Tyne (, ), often simply Newcastle, is the most populous City status in the United Kingdom, city and metropolitan borough in North East England. It forms the Tyneside conurbati ...
as a result of the
business cycle The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the pl ...

. The monopoly was generated by formal meetings of the local management of coal companies agreeing to fix a minimum price for sale at dock. This collusion was known as "The Vend". The Vend ended and was reformed repeatedly during the late 19th century, ending by recession in the business cycle. "The Vend" was able to maintain its monopoly due to trade union assistance, and material advantages (primarily coal geography). During the early 20th century, as a result of comparable monopolistic practices in the Australian coastal shipping business, the Vend developed as an informal and illegal collusion between the steamship owners and the coal industry, eventually resulting in the High Court case Adelaide Steamship Co. Ltd v. R. & AG.

Persian filoselle (raw silk)

In the 17th century, Shah Abbas established New Julfa (a suburb in the capital of Isfahan) to concentrate
Armenia Armenia (; hy, Հայաստան, translit=Hayastan, ), officially the Republic of Armenia,, is a landlocked country A landlocked country is a country A country is a distinct territory, territorial body or political entity. It is ...

n financial capital in Iran. Accordingly, he gave
Armenia Armenia (; hy, Հայաստան, translit=Hayastan, ), officially the Republic of Armenia,, is a landlocked country A landlocked country is a country A country is a distinct territory, territorial body or political entity. It is ...

ns various privileges, including the monopoly to trade Persian filoselle (raw silk). Armenians exported it all over the world, including Asia, Europe, and America. By the 1750s, Armenia already controlled 75% of the total silk trade in the area. This resulted in a boom in Armenian commerce, which lasted for the next 150 years.

Petroleum

Standard Oil Standard Oil Co. was an American -producing, transporting, refining, and marketing . Established in 1870 by and as a in , it was the largest in the world at its height. Its history as one of the world's first and largest s ended in 1911, wh ...

was an American
oil An oil is any nonpolar In chemistry Chemistry is the science, scientific study of the properties and behavior of matter. It is a natural science that covers the Chemical element, elements that make up matter to the chemical compound ...

producing, transporting, refining, and marketing company. Established in 1870, it became the largest oil refiner in the world.
John D. Rockefeller John Davison Rockefeller Sr. (July 8, 1839May 23, 1937) was an American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the United States The United States of Am ...

was a founder, chairman and major shareholder. The company was an innovator in the development of the business trust. The Standard Oil trust streamlined production and logistics, lowered costs, and undercut competitors. "
Trust-busting Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as ''anti-monopoly A ...
" critics accused Standard Oil of using aggressive pricing to destroy competitors and form a monopoly that threatened consumers. Its controversial history as one of the world's first and largest
multinational corporation A multinational company (MNC) is a corporate A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whethe ...
s ended in 1911, when the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

Supreme Court A supreme court is the highest court A court is any person or institution, often as a government institution, with the authority to Adjudication, adjudicate legal disputes between Party (law), parties and carry out the administration of just ...

ruled that Standard was an illegal monopoly. The Standard Oil trust was dissolved into 33 smaller companies; two of its surviving "child" companies are
ExxonMobil Exxon Mobil Corporation, stylized as ExxonMobil, is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multip ...
and the
Chevron Corporation Chevron Corporation is an American multinational . One of the of , it is headquartered in , and active in more than 180 countries. Chevron is engaged in every aspect of the and natural gas industries, including and ; , marketing and transpor ...
.

Steel

U.S. Steel has been accused of being a monopoly. J. P. Morgan and Elbert Henry Gary, Elbert H. Gary founded U.S. Steel in 1901 by combining Andrew Carnegie's Carnegie Steel Company with Gary's Federal Steel Company and William Henry "Judge" Moore's National Steel Company. At one time, U.S. Steel was the largest steel producer and largest corporation in the world. In its first full year of operation, U.S. Steel made 67 percent of all the steel produced in the United States. However, U.S. Steel's share of the expanding market slipped to 50 percent by 1911, and antitrust prosecution that year failed.

Countering monopolies

American economist Milton Friedman believed that laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing tariffs and other regulation that upholds monopolies. However, economist Steve H. Hanke believes that although private monopolies are according to him more efficient than public ones, often by a factor of two, sometimes private natural monopolies, such as local water distribution, should be regulated (not prohibited) by, e.g., price auctions. Thomas DiLorenzo believes, however, that during the early days of utility companies where there was little regulation, there were no natural monopolies and there was competition. Jörg Baten, Baten, Bianchi and Moser produced research, arguing that monopolies which are protected by patent laws may have adverse effects on the creation of innovation in an economy. They argue that under certain circumstances, compulsory licensing – which allows governments to license patents without the consent of patent-owners – may be effective in promoting invention by increasing the threat of competition in fields with low pre-existing levels of competition.