The effects of monopolies on the U.S. Economy
What is a monopoly?
The concept of a monopoly is largely misunderstood and the mere mention of the term evokes lots of emotions that make clear judgment almost impossible. The standard economic and social case for or against monopolistic businesses is no longer straightforward.
According to Mankiw (2009) a monopoly is defined as a market structure characterized by a single seller of a unique product with no close substitutes. When a business dominates a market, it becomes a monopoly by virtue of its power. A company (or a group of affiliated companies) is considered to have a dominant position in a particular market if it exerts a decisive influence over the general conditions of trade in that market or can restrict access to that market for other businesses. Markets keep changing with the times and so are the conditions in which businesses must operate regardless of whether they have any noticeable market power.
Monopolies have contributed significantly in transforming the US economy to be the leading economy worldwide. This is largely due to the benefits arising from legal monopolies created by the Patent and copyrights law. Monopolies are in effect powerful tools of spurring economic growth in the US.
How do monopolies arise?
Two major conditions contribute to formation of a monopolistic trade environment. A product which has no close substitutes faces no competition thus its producer becomes a monopolist. Exclusive ownership of a key resource may lead to creation of a monopoly. A classical case is exemplified by the control of the computer hardware, market by International Business Machines (IBM) for nearly forty years. Due to its market dominance over the hardware, institutions that intended to initiate a project had to do so with IBM. (Rise in Monopolies, n.d.) Monopolies also develop where there are barriers to market entry. These barriers are obstacles that make it difficult or impossible for any potential competitors to penetrate a particular market. Such barriers could either be natural or legal constraints that protect a firm from competitors. A natural monopoly arises when technology for producing a product enables one firm to meet the entire market demand at a lower price than two or more firms could. Legal monopolies develop in a market in which competition and entry are restricted by the concentration of ownership of a natural resource or by the granting of a public franchise, government license, patent, or copyright. When Microsoft licensed an operating system from Seattle Computer Company in 1981 their explosion into dominance began. Microsoft’s dominance over the operating systems enabled it to diversify into producing spreadsheets and word processors. These new software were made such that they worked best with its operating system hence tightening Microsoft’s grip of the market.(Mises,1981, p.86). Certain circumstances do lead to creation of near monopolies or oligopolies. An oligopoly arises when a small number of firms have relatively large market shares. Though each firm is independent, interdependence may arise whereby one firm’s actions influence the profits of the other firms. In addition, when a small number of firms share a market, they can collude to increase their profits by forming a cartel and acting like a monopoly. Default monopolies may arise when there is lack of sufficient knowledge or interest on a particular subject. A firm may end up being a small monopoly by having an upper hand when it comes to accessing knowledge on a particular trade. A case in point is the sole garbage collecting company in Taos.
Are monopolies beneficial or detrimental to the US economy?
Monopolies have been in existence throughout business history and several corporations have achieved complete dominance over a wide array of industries. The monopolies have been accused of charging exorbitant...
Please join StudyMode to read the full document