A monopoly is a market structure in which one supplier with no close competitors dominates the entire market for a good or service. Under US antitrust laws that date back to 1890, companies that command a market and engage in any behavior that discourages competition are considered monopolies.
The case for regulating monopolies includes three main points: price efficiency, innovation, and consumer protection. Without market competition, monopolistic firms have unchecked power to set prices without considering a consumer's actual willingness to pay. As a result, prices are often higher than is efficient for that market. Similarly, competition incentivizes innovation—in order to remain competitive, firms must continue developing new or better goods and services.
Monopolies aren't inherently good or bad. Some monopolies, like power companies, are the natural result of high barriers to entry in a market. Other monopolies, like the Rockefeller family's infamous Standard Oil, had to be broken up after corrupt business practices manufactured those barriers to entry. Ultimately, the decision to regulate monopolies comes down to how firms handle competition in the market.
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True monopolistic companies face no competition, meaning there aren't any near substitutes for the goods or services the company provides. Often, no competition exists because the monopoly is either approved by the government or the barrier to entry is costly.
Many American monopolies popped up during the rapid industrial growth of the Gilded Age. Industries like steel, tobacco, railroads, and telecommunication have all been monopolized at some point in history.
Price discrimination is a business practice in which different customers are charged different prices for the same product or service. It's one way for a business to boost profits and take advantage of its market position. There are three levels of price discrimination, differentiated by the consumers targeted and the reasons for discrimination.
Before "Monopoly" became a best-selling board game, a woman named Lizzie Magie patented "The Landlord's Game" as a thought experiment to advance American economist Henry George's ideas about land ownership.
John D. Rockefeller's Standard Oil Trust enabled him to evade laws against a single corporation buying stock in another. His centralized board of directors held stock in many different oil companies under his control, allowing Rockefeller to eventually monopolize the oil refining industry. Efforts to regulate and prevent the Standard Oil Trust's monopoly became known as "antitrust" laws.
In modern economic theory, there are four main market structures. Under each market structure, firms (or businesses) have differing levels of competition and reach different levels of price efficiency based on the consumer's willingness to pay for a product or service.
A warehouse explosion in 2008 forced all pyrotechnic shipments to travel through the Shanghai port under three special permits Ding Yan Zhong was given. Since then, he has established a near-monopoly over the global fireworks distribution chain, with logistics and shipping hubs in China and California. (Some users may experience a paywall.)
When a few large companies dominate a market, changes in pricing for goods and services affect the entire market. Airlines are a common example of an oligopoly. Because the barrier to entry in the aviation industry is high, only a few airline companies offer the majority of the industry's services. While there is some competition, pricing across the board is largely intertwined and based on other companies' prices.
With Peter Thiel's "Monopoly Theory," the Founders Fund partner argued that investing in companies that create new categories, rather than those that compete with other businesses in existing ones, is a best practice in venture capital.
This podcast series traces how the US government's approach to regulating big business has changed over a century—from the DOJ's breakup of John D. Rockefeller's Standard Oil monopoly, through lawyer Robert Bork's influence on how courts interpret competition law, to the FTC's modern antitrust lawsuit against Amazon.
The United States is home to more than 33 million businesses, the vast majority of which are small businesses, with millions being created (and others closing shop) every year. These businesses often rely on loans, provide the goods and services that keep the economy flowing, and sometimes even grow large enough to enter public markets or provide private investment opportunities. Explore key topics central to business and finance, from the role of the Federal Reserve to how initial public offerings work, how millions of American students finance higher education, and more.