Post No.: 0592
A pure ‘monopoly’ is when there’s only a single seller of a product in a particular market and there are no close substitutes. Because of this lack of competition and thus lack of choice, this sole seller can unilaterally restrict supply and dictate the product’s price, and if consumers don’t like it then they cannot just go elsewhere because there is no one else. Less real choice and higher prices are obviously bad for consumers. Monopolies can thus result in deadweight losses and market failures because of insufficient production and/or extortionately high prices.
An ‘oligopoly’, where an industry/sector is dominated by just a few large sellers, isn’t ideal either. Such firms might collude with each other too i.e. form a ‘cartel’. (Cartels can also exist amongst states e.g. OPEC.) When colluding (e.g. by creating artificial scarcities, fixing prices/rates, together), they’re not competing with each other to fight for our custom (e.g. by trying to undercut each other on price) hence they can keep prices, and ultimately their own profits, high. Colluding is like sports teams match-fixing their results – it robs from the fans and other teams who aren’t a part of the collusion.
So sometimes the term ‘monopoly’ is used more loosely, as it will here. Regulators might define a monopoly as when a single firm controls ≥25% of a particular market.
Vibrant competition in all markets is what a flourishing economy needs – where different firms who are completely independent from each other are motivated to innovate, improve product quality, operate more efficiently to reduce costs, and offer attractive prices, in order to ultimately win our custom. A lack of lively competitive pressure has the opposite effect – it’s akin to politically having a single-party state.
So when we hear terms like Big Energy, Big Food, Big Pharma, Big Media, Big Banking, Big Law, Big Accountancy, Big Defence, Big Tech, etc. to refer to industries that have only a small handful of powerful key players – these industries aren’t in an ideal state. In a perfect market, there’d be ‘perfect competition’, where the quantity supplied for every product, including labour, would equal the quantity demanded at the current price. We want real and healthy competition, but ‘monopolistic competition’ is a form of ‘imperfect competition’, where there may be many sellers apparently competing against each other but they’re selling products that aren’t exactly perfect substitutes for each other, which means that they’re not exactly competing against each other and so customers lack choice if they only want or can afford something specific (e.g. a squeaky bone instead of a squeaky ball).
In a theoretical pure/perfect competition market – no firm would realise any economic rents/profits whatsoever. ‘Economic rent’ is a return in excess of a resource owner’s opportunity cost of capital. This includes those obtained due to monopolistic positional advantages, that help the big and wealthy establishment stay or grow even more so. Instead of prosperity bringing everyone in society up, inequality widens.
A ‘monopsony’ is similar to a monopoly but there’s only a single buyer of a product. So one buyer has power to dictate terms to all sellers, rather than one seller has power over all buyers. This is again undesirable. An ‘oligopsony’ is the equivalent other side of the coin to an oligopoly.
There are numerous anti-competitive practices with which dominant firms can abuse their positions in their markets, such as aggressive predatory pricing tactics. They can benefit from volume discounts and economies of scale then more easily absorb losses when lowering prices to below market rates until smaller competitors are squeezed to death i.e. they can win any temporary price war. In all kinds of contexts, incumbent leading powers can behave aggressively towards rising powers in order to stay number one; and they have the means or spare capacity to too. There’s also tying (e.g. only being able to get a particular phone if you go with a particular mobile contract provider), bundling (e.g. a major laptop vendor who’ll only sell laptops together with software packages that consumers may not want), or the refusal to supply one’s competitors with essential inputs/components or only at a price that’ll completely destroy their margins.
Smaller businesses already have more limited R&D capabilities, find it harder to afford and secure patents, meet sudden customer demands, survive market shocks, and cannot bear the high cost of entry into some markets, for example. Meanwhile, larger firms find it easier to expand into and dominate in other markets too by using their wealth to acquire other companies, to become conglomerates. Sometimes we see many different brands in the market but lots of them are actually owned by the same parent group (e.g. ‘sister companies’ in clothing retail) hence the illusion of healthy competition in the marketplace.
Large firms like to buy up young, innovative companies and thus nip their future competitors in the bud. And they can do so relatively cheaply (e.g. Facebook bought Instagram for ~US$1bn in 2012, but in 2020 it had an estimated worth of ~US$100bn). There’s of course risk, and pumping in extra investment, but a giant company could buy a competitor of yours out and that action alone would likely send your stock price tumbling, as investors would rather invest in that company over yours.
Monopolies can be considered as an extreme outcome of free-market capitalism in the sense that a hugely powerful firm, or small group of firms, can naturally arise in a market that’s absent of any anti-trust laws and regulations. When effective, these prevent industry collusion and any mergers or acquisitions/takeovers that’d result in overly-dominant entities (either via horizontal integration e.g. swallowing competitors, or vertical integration e.g. supply chain market foreclosures). So we need these laws and regulations to ensure that a marketplace remains open and competitive. The government’s role in the economy is to ensure competition and stabilise the currency and banking system. The markets need a little help to work more optimally. Self-regulation, self-policing and voluntary codes aren’t always effectual.
Anti-trust laws should apply to ‘free’ services too because they’re not really free (consumers pay with their personal data and/or attention/time watching adverts). Price isn’t the only way that firms can compete, create monopolies and stifle competition. Some tech corporations dominate services worldwide in a way that you couldn’t completely escape from them (like you could through emigration if you didn’t like a particular country’s government) without living primitively, and their monopolistic power impacts on consumer choice, workers’ rights and perhaps democracy itself.
When there are just a small handful of large supermarkets – farmers have low bargaining power and get coerced because things like milk are highly perishable thus if they refuse a derisible deal then it’ll all be wasted. So farmers have it tough and it’s not generally an attractive industry to be in despite food production being incredibly vital for a nation. Solutions can be trade unions or government subsidies.
A dominant search engine company can shut out or exclude rivals by paying computer vendors to install their software onto machines and make it the default browser option, because they can afford to. They might argue that users still have a choice. Still, it’s probably not a good sign when one company or product name becomes the verb (e.g. ‘to Google’ when searching the web).
A large firm with an established product can coerce suppliers or retailers to sign procurement contracts that forbid them from selling to or buying from any competitors. This exclusive dealing can happen with beverages and restaurant chains.
Large pharmaceutical companies can incentivise doctors to promote or prescribe the use of their products over products from competitors who cannot afford such ‘incentives’.
Aggressive prices, convenience and customer loyalty could lead to a company dominating, and we might ask, “What’s the problem?” Diversity is often richer in relatively poor places because a small number of large players often dominate in rich places – but to let small businesses disappear and allow large businesses to dominate ‘because it’s just survival of the fittest’ would be short-sighted. Like in nature, a market full of diversity is more resilient – the impact of a few smaller firms going bust isn’t going to cause major economic ripples, whereas if one or two big firms collapse, lots of jobs could be lost and the markets could crash, which might mean that such firms become ‘too big to let fail’ i.e. if one starts to fail, the government might be forced to bail it out (with taxpayers’ money) in order to prevent a damaging ripple effect on the wider economy.
Large companies that can single-handedly affect economies in significant ways have a colossal influence on governments. Several big banks had to be bailed out after the 2007/2008 Financial Crisis to shore up market confidence. That’s why there are constant calls to break up overly-dominant corporations (although this rarely happens precisely because large companies are extremely powerful politically), or at least divest their assets.
Smaller businesses can, sometimes, be more agile to adapt to changing circumstances. Diversity is more robust in a world or future that’s unknown i.e. don’t put all your eggs in one basket. A mixed economy is a form of diversity too.
But certain products produce a ‘network effect’, where the more they’re demanded the even more they’ll be demanded (positive consumption externalities). Social networks become more popular the more popular they are, for instance.
‘Natural monopolies’ can arise when companies become increasingly more efficient the larger they become (e.g. utility companies). This makes it almost impossible for new entrants to compete with any already-established firms in a market. Such monopolies may be government-granted/allowed though because the high start-up costs, fixed costs and barriers to entry make it more efficient for there to only be a sole provider of these services. Or imagine if every street had multiple water pipes or roads from different competing suppliers! But – like regarding externalities, public goods and common resources – heavy oversight is required to protect the public’s interests; otherwise, say, a big communications service provider who owns the infrastructure could deliberately decrease the connection quality of competitor services using their lines. Alternatively, these (essential) services may arguably be better off publicly owned as state monopolies so that they’re controlled by the people for the people.
Market inefficiencies can arise due to monopolies (barriers to entry), IPR (barriers to imitation), first-mover advantages, or arbitrage. Patents only grant limited-term monopolies though and, on balance, encourage innovation by protecting the efforts of inventors. (In democracies, political parties that secure a majority of seats are effectively granted a kind of temporary monopoly too.) Patented drugs are heavily regulated because they’re not ‘luxury’ items for those who need them – expired-patent or generic drugs, which aren’t price regulated, will therefore only be cheaper if there’s sufficient market competition. (Cases exist where monopolies of generic medicines have charged thousands of times the regulated prices! These companies, when free to do whatever they like, profiteer at the expense of moral conscience. The NHS are charged these exorbitant prices too.) Heavily publicly-funded inventions should arguably all become instantly available for all to exploit, rather than provide a monopoly to a patent holder.
…So monopolies usually lead to unfair, unequal and inefficient markets. They can control prices and consumer options. Unfettered competition can ironically harm competition itself in the long run – it’s in the rational self-interests of firms to destroy their competition to try to be the only player left standing, but that’s crummy for consumers. If the existing winners only get stronger and there’s no chance for any newcomers to beat the establishment, this discourages entrepreneurship too.
Woof. We must ultimately ensure that no individual, organisation or group in any sphere becomes too large and wealthy because this leads to overly-concentrated power and control. This includes the lack of effective political opposition against incumbent governments, or laissez-faire human activity dominating the planet to the detriment of biodiversity, and humans themselves, in the long run.