The definition of monopoly is when one company dominates a market – meaning that consumers have no alternative places to buy their goods or services.
There are several reasons that monopolies can emerge. Sometimes, rivals might not be able to enter the market because it is too expensive or technologically difficult to do so. Plus, if a company with an original product gains a patent that stops other firms from copying them, they can enjoy a natural monopoly.
A business doesn’t have to have 100% share of a market to be considered a monopoly. In some countries, such as the UK, a company is regarded as having monopoly power if they have achieved dominance of more than 25%. Mergers and acquisitions between big companies are often stopped if regulators fear they would end up having an excessive amount of influence over the market.
Downsides of monopolies
Monopolistic markets can be harmful for businesses and consumers alike. Powerful companies can end up fixing prices and overcharging because they have a captive audience. They can also stymy innovation because smaller competitors are unable to compete. Generally, governments try to clamp down on monopolies – but there are exceptions.
Upsides of monopolies
There are certain times when monopolies are encouraged, as they can help keep costs down for consumers. Good examples include the supply of electricity to homes and water. It would be inefficient if dozens of companies had their own power grids or pipelines – so in order to achieve economies of scale, one company may be given the right to run the network under strict regulation.
Companies can be punished if they are found to be exhibiting monopolistic behavior. Some firms have faced heavy fines – and governments have even broken up giant corporations in the past.
For example, at one point, a US firm known as Standard Oil dominated 90% of oil refineries and pipelines in America – establishing a stranglehold on a scarce resource. The government eventually managed to break up its monopoly by creating a series of smaller companies that would be able to compete with one another, lowering prices and boosting innovation.
In 2004, Microsoft found itself in hot water when it was accused of abusing its “near monopoly” status for financial gain. The European Union slapped the tech giant with a $611 million fine – a record at the time – when it was accused of crushing competitors by preinstalling its media player on the Windows operating system.