A monopoly is a MARKET STRUCTURE where there is one producer, no close substitutes, and considerable BARRIERS TO ENTRY. In the United States, PUBLIC UTILITIES (electricity, telephone, cable, and water) are monopolies. These and many other monopoly markets are created by a variety of conditions. Public utilities are what economists call “natural monopolies.” In these markets it is natural or makes sense to have one large firm because it can produce at a lower average cost than many small firms (ECONOMIES OF SCALE). Telephone service in the early 1900s was initially a competitive market, with many producers using a variety of telephone equipment, often incompatible with each other. In some cities there were as many as five telephone companies. A business wishing to be able to communicate by phone with its customers and suppliers would have five different phones in their office and pay for service to five different companies. Because telephone systems involve significant CAPITAL investments in equipment and lines, telephone companies have huge fixed COSTS but relatively low variable costs. If the company could spread its fixed costs over a large customer base, it could reduce its average cost of telephone service and achieves economies of scale. It was inefficient and redundant to have many small telephone companies, so with government approval, monopolies were created in regional markets, and AT&T; was given monopoly control in long-distance markets. With price regulation, consumers received lower costs and better service. Government also creates monopolies through PATENTs and licenses. Patents give an inventor monopoly rights on new devices or processes for a specified period of time. Until recently in the United States, patents gave monopoly rights for 17 years from the time the patent was granted. Recently, in order to comply with the General Agreement on Tariffs and Trade (GATT), U.S. patent rights are now issued for 20 years from the time the application is filed. Patents are an incentive for producers to create new and improved products, because monopoly control over a useful device usually results in significant PROFITs for the patent holder. Like patents, licenses received from government result in monopolies. For example, hospitals wanting to expand their service offerings are required to get a certificate of need from state authorities. Neighboring hospitals that already provide a service will often oppose allowing a new hospital to offer the same service, as they do not want to lose their monopoly. Another source of monopoly power is control over a critical resource. For years DeBeers has dominated the diamond market, controlling almost all of the world’s supply of raw diamonds. In 1999 Microsoft was accused by the U.S. Justice Department of abusing its monopoly power in personal-computer operating systems. Since by definition a monopoly is a market with only one firm and no close substitutes, monopolists have considerable market power, which often allows them to charge higher prices and earn significant profits. However, just because a firm is a monopolist does not necessarily mean that it will earn economic profits. If there is no sufficient DEMAND for the firm’s products, the monopolist may not be able to earn a profit at all. These are other common myths about monopolists as well, including:
• Monopolists always charge the highest price.
• Monopolists can ignore consumers.
• Monopolies go on forever.
Even though they are a monopoly, monopolists do not control consumers and therefore cannot force consumers to pay whatever price they want to charge. Like all firms, monopolists face a market demand curve, in which higher prices lead to lower quantities demanded. Monopolists therefore cannot ignore consumers. The earlier example of telephone service illustrates the fact that monopolies do not go on forever. In the 1980s, when new technology allowed alternative (microwave and later satellite) delivery of communication, AT&T;’s monopoly ended. The telephone-service example also illustrates the question of whether monopolies are good or bad for society. Without regulation, monopolies generally result in higher prices and lower output as compared to competitive markets. But with regulation monopolies can result in lower prices and greater output. Monopolies are also an incentive to provide new goods and SERVICES for consumers and increases in productivity. Much of the ECONOMIC GROWTH during the 1990s in the United States is attributable to the development and utilization of new technology. Monopolists who use their market power to prevent new competitors to enter the market harm society. The SHERMAN ANTITRUST ACT of 1890 and subsequent acts make attempts to monopolize trade a criminal offense.