The idea of monopolies is fascinating. How is it that one specific corporation managed to be the only relevant partaker of that industry? What did they do to get there, and how are they maintaining their position? Is it even beneficial for us to have monopolies? Read on for the answers to these questions.
What is a monopoly, even?
The term monopoly originates from the Ancient Greek language. Monos means “sole”, and poleo means “sell”, roughly translated, it means “Sole Seller”. A monopoly refers to when a company and its product offerings dominate a sector or industry. The term monopoly describes an entity that has total or near-total control of a market.
For an entity to be considered a monopoly, it must:
- Be the single producer or seller in that market
- Have no other close substitutes
- And, there must be barriers to the entry of new firms
How are monopolies formed?
- Free-market capitalism:
Monopolies may be the extreme result of the absence of governmental restrictions. A single company or group becomes large enough to own all or nearly all of the market for a particular type of product or service.
- High Costs Scare Competition
If it costs $1 billion to start a new tech company, that may be considered a high fixed cost. To supply its service to one customer, the marginal cost may be small, perhaps $10,000. However, at 50,000 customers, the marginal costs fall to $50 per customer, making it cheaper to provide the service.
- Ownership of Key Resources
This is how De Beers controlled the diamond industry throughout the 20th Century. It controlled diamond mines in South Africa and brought up those in other nations. It managed to keep control of the diamond supply for most of the 20th Century, only collapsing once international competition became increasingly fierce.
Another cause of monopoly is when the government grants a patent to businesses. If the inventor of a product knew there was no legal protection against the replication of their product, they may not invest the time, energy, and funds into developing it.
Some companies control the entire supply chain, from production to retail. Target, for example, has its store brands and manufacturing plants. They create, distribute, and sell their products—eliminating the need for outside entities such as manufacturers, transportation, or other logistical necessities.
Why should you care about monopolies?
- Monopolies foster innovation
Without patents and monopoly power, drug companies would be unwilling to invest so much in drug research. The monopoly power of patents provides an incentive for firms to develop new technology and knowledge that can benefit society.
Additionally, monopolies may make a supernormal profit that funds investment. This leads to improved technology and dynamic efficiency. For example, large tech monopolies, such as Google and Apple have invested significantly in new technological developments.
- Monopolies have very high bargaining power
Monopolies may suddenly decide to increase their selling prices or drastically change their product. Because they are monopolies, consumers will have no choice but to acquiesce to their demands or give up the consumption of the product.
The debate here isn’t if they are likely to do that. The point of concern is that they have the power to do it.
- On the other hand, monopolies may just bring down your cost of consumption.
For example, it would make no sense to have many small companies providing tap water because the small firms would be duplicating investment and infrastructure. The large-scale infrastructure makes it more efficient to have just one firm – a monopoly.
The government has to be doing something about this, right?
It is, though arguably, not enough.
History of Monopolistic Law in India
India had a competition law enacted through the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act). This legislation regulated the concentration of economic power in a few hands that were prejudicial to the public interest and therefore prohibited any monopolistic and restrictive trade practices.
Post-economic liberalization in 1991, it became imperative to put in place a competition law regime that was more responsive to the economic realities of the
nation and consistent with international practices. Consequently, in 2002, the Indian Parliament approved comprehensive competition legislation — the Competition Act 2002 (Competition Act), to regulate business practices in India so as to prevent practices having an appreciable adverse effect on competition (AAEC) in India.
The Competition Act primarily seeks to regulate three types of conduct: anti-competitive agreements, abuse of a dominant position, and combinations (i.e., mergers, acquisitions, and amalgamations).
Administration and Legislation
The Competition Act has also created a new enforcement authority, the Competition Commission of India (CCI), which is solely responsible for the enforcement and administration of the Competition Act.
If the CCI is of the opinion that a combination is likely to cause an AAEC within India, the CCI may either pass an order prohibiting the proposed combination or may permit the combination subject to modifications in the scheme of merger, acquisition, or amalgamation.
Failure to notify a combination to the Commission can result in a fine of up to 1 percent of the combined value of the turnover or the assets of the enterprises involved, whichever is higher. The CCI has exercised such powers in a number of instances. For belated notification, the CCI has imposed penalties up to INR100 million in a transaction involving Titan International and Titan Europe.
Examples of monopolies in India, and Regulatory Action against them
In India, a number of internet platforms including Google, Facebook, Walmart Inc.-owned Flipkart, Amazon, Uber Inc., and Ola Cabs (ANI Technologies Pvt. Ltd) enjoy dominant positions in their respective niches.
So far, while cases have been brought at the CCI against the likes of Google, Flipkart, Uber, and Ola, the regulator has only found merit in one complaint against Google. In February 2018, Google was fined ₹136 crores for abusing its “dominant position” in search by the CCI in response to a complaint filed by Matrimony.com Ltd and Consumer Unity and Trust Society.
Why do governments tolerate monopolies?
PayPal co-founder Peter Thiel advocates the benefits of a creative monopoly. That’s a company that is “so good at what it does that no other firm can offer a close substitute.” He argues that they give customers more choices “by adding entirely new categories of abundance to the world.”
It is difficult to break up monopolies. The US government passed a lawsuit against Microsoft, suggesting it should be split up into three smaller companies but it was never implemented.
Governments can implement regulation of Monopolies e.g. OFWAT regulates the prices for water companies. In theory, regulation can enable the best of both worlds – economies of scale, plus fair prices. However, there is concern about whether regulators do a good job.
Monopolies have incredible powers of changing costs of products, extortion, unfair treatment of labor, etc., and hence anti-monopolistic laws are made. The Competition Act, enacted in 2002, which regulates monopolistic behavior has created a new enforcement authority, the Competition Commission of India (CCI). Monopolies come with many pros and cons for both producers and consumers, and gray areas here are efficiency, price, exploitation, and legality.
In the words of Benjamin Tucker, “It is not competition, but monopoly, that deprives labor of its product. Destroy the banking monopoly, establish freedom in finance, and down will go interest on money through the beneficent influence of competition. Capital will be set free, business will flourish, new enterprises will start, labor will be in demand, and gradually the wages of labor will rise to a level with its product.”
The views expressed in this article are the author's own.