Dictionary
Debitoor's accounting dictionary
Monopoly

Monopoly - What is a monopoly?

A monopoly occurs when one company completely dominates and can influence their particular industry or market

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A company is considered to have a monopoly on a market when they create and sell a product and have no direct competitors. There are no substitutes for that particular product, so the company/supplier has a considerable amount of control over the market.

When a company has a monopoly on a market, it means that it has become large enough to also have ownership of all parts of the market for a product - from goods to supplies, infrastructure, assets, etc.

Monopolies are in fact, illegal. A lack of competition gives companies with monopolies total control over a market and can lead to corruption, and can result in unfairly high prices as well as poorer quality products.

Yet monopolies still occur today. The one exception to this would be ‘natural monopolies’. This refers to businesses that develop a monopoly over a market. They are commonly regulated by the government, such as the main postal service, or other utility companies. Natural monopolies are not considered illegal.

How to recognise a monopoly

There are a number of specific things to look for when it comes to determining whether a monopoly is present. These features include:

High barriers to entry (or non-existent barriers to entry). When a monopoly is present, it will be extremely difficult or impossible for potential competitors to enter the market.

One seller of a product. In a monopoly, there is typically only one company/group that sells the product.

Control of pricing. A company with a monopoly on the market will be able to set the pricing for the product, as well as make changes to the pricing at any time.

While there might be additional factors in determining whether a company has a monopoly on a market, these are the main ones that are first addressed.

Preventing monopolies

Governments have set up a series of measures to prevent the formation of monopolies in markets. These are known as ‘Antitrust laws’. Antitrust legislation is designed to help protect the consumer as well as to allow for healthy competition between businesses in a market.

Generally, it does not aim only to suppress the growth of the large companies that are more likely to develop a monopoly, but instead encourages the growth of smaller businesses.

What happens if a monopoly has already formed

There have certainly been cases where a company has gained a monopoly despite the antitrust laws. In these situations, the government usually steps in and charges the company with violation of antitrust laws, with the intention of breaking up the monopoly.

For example: One of the most publicised charges of monopoly involved Microsoft. In 1994, the US Government filed a complaint that Microsoft had been using ‘exclusionary and anti-competitive contracts’ to maintain a monopoly on the market of personal computers. Famously, the court’s decision that Microsoft must be split into two separate companies was later reversed.

Microsoft was ordered to make some changes, however, they continued to operate as usual. Thankfully today, a number of competitors have decidedly broken their once-held monopoly in the market of personal computers.