A true monopoly can be categorized as having “exclusive possession or control” and is typically used in the context of corporations and markets. Colloquially it is used to describe a company with a large market share that faces minimal amounts of competition such as Amazon or Walmart.
It is widely believed that monopolies arise as a result of freer markets and a lack of government intervention. The reason there is a general distaste for monopolies is because of the idea that they engage in tactics like price gouging. This means that because they are the sole distributor of a commodity, they can dramatically raise prices without any consequence because they have no competitors to undercut them. In opposition to popular belief, free market economists argue that monopolies are actually caused by government intervention, and within a free market, monopolies would cease to exist. These economists also have other reasons as to why monopolies are unwanted which centers around them being inefficient and unable to engage in proper economic calculation rather than them “price gouging.” Within America there have been many examples of monopolies. “To date, the most famous United States monopolies, known largely for their historical significance, are Andrew Carnegie's Steel Company (now U.S. Steel), John D. Rockefeller's Standard Oil Company, and the American Tobacco Company.”
The common explanation for how monopolies arise is through a method called predatory pricing, which is when a company cuts prices (even to the point in which they are selling at a loss) for the sake of cutting all competition out of the market. In an analysis called “The Myth of Predatory Pricing'' by economist Thomas J. DiLorenzo he states, “The theory of predatory pricing has always seemed to have a grain of truth to it--at least to noneconomists--but research over the past 35 years has shown that predatory pricing as a strategy for monopolizing an industry is irrational, that there has never been a single clear-cut example of a monopoly created by so-called predatory pricing.” There is a rather simple explanation for why this is true. It starts with the massive presupposition that a business has the necessary capital to cut prices and sell at a loss or near loss for the given amount of time. It also assumes away the possibility of a competitor competing with these massive price cuts by cutting prices themself, and engaging in this “price cutting war” would be very risky and likely detrimental. Also it completely disregards the possibility of more firms being created in that industry after the prices rise back up. In other words, even if we accept the first few premises and a company cuts out the competition and begins to monopolize, what is stopping more from being created and becoming new competitors.
The explanation given by free market economists as to how monopolies come into existence starts with something called barriers to entry. A barrier to entry in relation to markets is simply something that an entrepreneur would have to do before they can start a business in a market or something that an entrepreneur knows they will have to do once they enter a market. Barriers to entry do exist naturally however when it comes to monopolization it is most likely that the barriers which holistically prevent competition are government enforced. For example, licensing laws make entrepreneurs obtain specific licenses for certain businesses and they have to go through a process in which they may not even get approved. Another example can be minimum wage laws in which an entrepreneur may be discouraged from entering the market as they know they will have to pay their workers a specific amount of money which would decrease profits and decrease the likelihood of the business succeeding. Large corporations are aware of this, which is likely why people such as Jeff Bezos advocate for a $15 minimum wage law. As stated before these are examples of how the government enforces regulation which keeps competition out of the market and allows for monopolies to be created. In an empirical study called “Deregulation as a Means to Increase Competition and Productivity” by Laura Valoknen she found that “Since regulations impede the free entry of rivals, they ensure firms a quiet life. Deregulation has therefore great potential to boost productivity growth.” This shows that deregulation or “freeing the markets'' allows for competition which boosts economic productivity. If the other theory were correct then a decrease in productivity would arise rather than an increase.
A popular way in which people argue in favor of the theory that markets are at fault for monopolization is by using examples. They give examples of monopolies such as Standard Oil, Insulin, and De Beers diamond exchange to which they try to illustrate how these came at the hands of the market and not government intervention.
When talking about Standard Oil it has been perpetuated that it was a dangerous monopoly which arose in the free market and it would have been maintained if not for the government. The first thing that needs to be explained when talking about Rockefeller is that he beat out competition fairly. It also needs to be said that he did not harm consumers. Between 1874 and 1880 Rockefeller's market share of petroleum grew from 25% to 80%. Throughout this timespan the price of oil dropped from 30 cents per gallon to 8 cents per gallon. It does not seem that a man who allegedly exploited consumers would allow for a massive price drop off in the industry he practically controls. It is also well noted that Rockefeller paid his employees much better than his competition which would allow him to get the best workers on the market. When Rockefeller was taken to court by the government it was found that he did not engage in predatory pricing. Economist John S. McGee wrote a paper on this called “Predatory Price Cutting: The Standard Oil (N.J.) Case” in which he stated, “Judging from the Record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard's pricing policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could readily have made more.” Finally, it was seen that Rockefellers market share dropped from 90% in the late 1800s to 65% when the court case ended. This shows that without government intervention Rockefeller was still incapable of holding onto his market share, but he acquired his large market share through proper means that benefited consumers and workers. At first glance this still may seem as if it contradicts the free market economist position but it does not. Monopolies have two sides being the creation and the sustainment side. The free market position is that monopolization could occur in the creation process through proper means as Rockefeller did although it would still be extremely rare. However, when it comes to the sustainment process is when the free market position says it would not occur at all which is shown in this Rockefeller case as he quickly lost a large amount of his market share. Now the current day can be talked about by analyzing the insulin monopoly. In the current day there are three companies that control insulin production. For some reason people blame this “monopoly” on markets instead of the government. Patent laws are one of the regulations imposed by the government which allows for monopolies. A company can be granted a patent and no entrepruenr is allowed to enter that market anymore. There is a patent on insulin which allows for these three companies to have a stronghold on the market and entrepreneurs cannot enter the market to compete. If these patent laws did not exist then it can be reasonably assumed that there would be a massive price drop off on insulin as there would now be competition. Finally the infamous Da Beers Diamond Exchange can be analyzed. Da Beers is an international diamond company. They have been categorized as a monopoly and what is interesting about Da Beers is who actually owns the company. Now 85% is owned by Anglo American plc however the other 15% is owned by the government of Botswana. And according to Da Beers themselves they have been in an economic relationship with this government for 50 years. For an example of how the Botswana government has unfairly helped Da Beers we must look at the beginning. In the beginning when diamonds were first discovered in Botswana they were discovered in a region in which the San people lived. The Botswana government “coincidentally” forcefully relocated the San people when diamonds were found. The San went to court and won which concluded that they were illegally evicted from their land however the government has not listened and continues to keep the San away from their land. If not for this forceful government intervention Da Beers would not have gotten access to one of the most lucrative diamond reserves in Africa.
Antitrust laws are known as the “anti monopoly laws” as they were created for the sake of preventing monopolies. According to the Federal Trade Commission “The antitrust laws proscribe unlawful mergers and business practices in general terms, leaving courts to decide which ones are illegal based on the facts of each case. Courts have applied the antitrust laws to changing markets, from a time of horse and buggies to the present digital age. Yet for over 100 years, the antitrust laws have had the same basic objective: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.” What is interesting is the history behind these laws and how they actually came about. Antitrust laws were first lobbied for by small farmers that weren’t capable of competing with other farmers as they were cutting the prices of their cattle, transportation, etc… Farmers were also doing things such as replacing cotton with jute which was cheaper. Regarding transportation, there were accusations of monopolistic pricing in the railroad industry before 1887 (when the ICC was created) and that is not true. There was actually large amounts of competition among railroads but the reason that these farmers wanted to contest them is because these railroads offered rebates to the farmers that were large customers but not to the other farmers. It is likely that these other farmers that did not receive the rebates were upset and thus contested the system. This accusation was that these farming companies were engaging in monopolistic pricing tactics when in reality they were just being competitive. There were accusations that these companies were conspiring together in order to cut these companies out of the market, and when this was examined in the actual court case there was no proof. A common belief is that few large companies were succeeding at the loss of all small companies at the time. While this is not true as found by Gray and Peterson when they stated, “In the period 1840 to 1900, the division of national income between labor and property owners (capital and natural resource suppliers) remained in a 70-30 ratio. Over the same time span, both capital and developed resources increased faster than the labor force. This means that labor incomes per unit of labor rose compared with profits and interest per unit of property input.” (Gray, Ralph D., and John M. Peterson. Economic Development of the United States. Homewood, Ill, Richard D. Irwin, 1974.) Within markets, there will always be different distributions of income so it’s likely that those that supported anti-trust had happened to get on the lower end. But again this doesn’t entail that wealth was being concentrated. Many people believed trusts allowed for companies to lobby and gain help from the government, which means in order to solve this problem we shouldn’t eliminate trusts but rather eliminate the government's influence over the economy. The Sherman Antitrust Act was brought about by Senator Sherman who had made the argument that trusts were monopolistic behavior that companies engaged in, and it led to an increase in prices and a decrease in output. This is empirically false because at the time they listed the different industries that they claimed to be in the midst of monopolization, and they did not see a decrease in output as shown in the image below.
As stated before, antitrust regulations have the intent to stop monopolization and help protect competition but in reality, they actually do the opposite. Dominick Armentano, an economic professor, wrote a book on antitrust called Antitrust and Monopoly: Anatomy of a Policy Failure. In this book, he found that “Antitrust policy in America is a misleading myth that has served to draw public attention away from the actual process of monopolization that has been occurring throughout the economy. The general public has been deluded into believing that monopoly is a free-market problem and that the government, through antitrust enforcement, is on the side of the ‘angels.’ The facts are exactly the opposite. Antitrust...served as a convenient cover for an insidious process of monopolization in the marketplace.” (Antitrust and MONOPOLY: Anatomy of a POLICY Failure: DOMINICK T. Armentano, Yale Brozen. Independent Institute.) In a more specific case,Thomas J. DiLorenzo outlines in his paper “The Antitrust Economists' Paradox,” that “the Sherman Act was a tool used to regulate some of the most competitive industries in America, which were rapidly expanding their output and reducing their prices, much to the dismay of their less efficient (but politically influential) competitors. The Sherman Act, moreover, was used as a political fig leaf to shield the real cause of monopoly in the late 1880s-protectionism.”
In the end, it can be said that the process and causes of monopolization are largely misunderstood by the public. Tactics such as predatory pricing are not practiced and have not been used by companies to monopolize industries. Monopolization is rather caused by regulations and intervention from the government which either grants literal monopolies or allows for them to occur by creating artificial barriers to entry. Common examples of monopolies such as Standard Oil, Insulin, and Da Beers have been thought to be dangerous monopolies that are products of the market. In reality, Standard Oil was an efficient monopoly while it lasted and it actually began losing its market share due to competition rather than intervention. Insulin is an example of how the government can grant companies monopolies by literally telling entrepreneurs it is illegal to compete with them. And Da Beers was not getting help from the American government however their success is largely fueled by their relationship with the Botswana government. Antitrust laws have a history that is largely unknown by the public and investigations have shown that they came about in an unjustified manner. The enforcement of these laws and creation of them has helped monopolies and harmed competition which goes against the very purpose that it was supposed to serve. It needs to be said that if the goal is to take down monopolies, have competition, and maximize the productivity of the economy then the means should be de-regulation. This means that patent laws, minimum wage, licensing laws, antitrust laws, etc… all need to be gone. Government intervention within the economy needs to stop and the advocacy for more government intervention for the sake of ridding monopolies needs to stop. Everyone needs to open their eyes to reality and begin to accept the facts rather than the mythical story they were told about free markets.
Donovan Zagorin is a Junior in high school that attends Upland High School in Southern California. He has the goal of attending college for a political science degree once he graduates. His interest in politics began his Freshman year in high school when he was introduced to different political books. Ever since he started his journey he has continued to try to spread knowledge about the topics he cares most about.