Money and Markets: Monopolies

We are diving into monopolies today, but not the pass go and collect 200 kind, more like the enemy of competition type. You probably have a rough idea of what a monopoly is, but we are going to delve into how they form, how they are maintained, and why they are bad. A monopoly is defined as a company that has ownership of more than 50% of the market. Nowadays, the government works to make sure that monopolies don’t form, but before these regulations, monopolies had free reign over most major industries.

They can form because of a company using intellectual property rights or hoarding a resource. Monopolies are often maintained because of barriers to entry like pricing strategy. Since monopolies are meeting most of the demand within a market, they are producing a ton of product and spreading their fixed cost over a huge output. Therefore, they are able to have a lower average fixed cost and overall cost, and ultimately can engage in competitive and cutthroat pricing strategies to choke out and buy out their competitors.  For example, Carnegie Steel, which once controlled almost 70% of the industry, destroyed competition in the steel industry because of its total domination of the market. Through utilizing vertical integration, which means owning the entire manufacturing process, no smaller businesses could price lower than Carnegie and therefore couldn’t survive in the industry. So why is this bad? Adam Smith, who is basically the founding father of capitalism, proclaimed in his infamous book The Wealth of Nations that competition is the “invisible hand” that guides a healthy market back to equilibrium. Without this competition, companies don’t have incentive to produce at the lowest possible cost or to serve consumers with the highest quality of goods. Monopolies thrive on the basis of cutting out all competition, which makes them bad for the economy overall. This is why there is antitrust legislation in place today in order to restrict monopolies and encourage lots of competition in the US economy. 

So the next time you play monopoly, keep in mind that competition is what makes monopoly a game. Without it you would just have a board, colorful rectangles, and metal pieces. So, embrace the cut-throat nature and let the competition commence!