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Effects of Monopolies in the Usa Economy

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Effects of Monopolies in the Usa Economy

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  • November 20, 2009
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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[1]. 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.[2]

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...