A monopoly is a business, company, conglomerate, corporation, or corporate entity that is usually the only provider of a good, product, or service in a given market, which gives it a huge competitive advantage over other businesses or companies that try to provide a similar product or service. Monopolies are considered as such if they require a significant amount of capital, have the need to operate under large economies of scale, have a government mandate to ensure their sole existence, and offer goods, products, and services that others can’t substitute. Some companies become monopolies by controlling the entire supply chain, from production to retail; this is called vertical integration. Other companies buy out their competitors until they are the only ones left, otherwise known as horizontal integration. Read on to learn more about how monopolies can negatively affect the economy so that, before you find yourself in a legal bind by monopoly forces and have to ask what is an antitrust lawsuit, you will know your enemy!
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Monopolies and Manipulations
Neutralizing competitors is essential to the establishment of monopolies. As soon as competitors are done and dusted, monopolies have the freedom to raise prices as much as they want. If a new kid tries to enter the monopoly’s playground, the monopoly can play economic games and reduce prices until the new kid is driven away. Monopolies can recoup any losses with higher prices once all competitors have been driven out. The following are some other ways monopolies can cause harm to the free market economy:
- Inflation
Monopolies can set any prices they want, and they will raise costs for consumers to increase profit. They create cost-push inflation. The Organization of Petroleum Exporting Countries (OPEC) and its thirteen oil-exporting countries and their power to raise or reduce oil prices is an example of a monopoly capable of creating cost-push inflation.
- Price Fixing
Monopolies can fix prices whenever they want. They can do this regardless of consumer demand because they know consumers can’t do much to change the status quo. Price fixing happens especially when demand for goods, products, and services is inelastic (when people don’t have a lot of flexibility regarding purchase prices).
- Product Quality Decline
Not only can monopolies raise prices, but they can also supply cheaper and lower-quality goods, products, and services. A monopoly that provides such things is remarkably irksome and potentially damaging for a community with no choice but to buy and make use of them.
- No Innovation
Monopolies lose any incentive to innovate or provide “new and improved” goods, products, and services when there is a lack of competition. For example, cable companies and their technology remained stagnant until streaming services started to take hold of the television industry.
End of Game
A monopoly is created when a business or company effectively has sole rights to the pricing, distribution, and market of a good, product, or service. A monopoly’s existence is contingent on the nature of its business and trade. Monopolies have so much power in the market that it’s usually impossible for any competing businesses to enter the market. They are formed when one or more companies or entities have taken control of the most business in an economic sector. A monopoly can wreak havoc on the economy through cost-push inflation, price-fixing, low-quality goods or product & service provision, and non-innovation. All these lead to disgruntled consumers and market players begging to be let out of a game they had no choice of playing.
