What Is So Bad About Monopolies?

Can a monopoly be sexy?

A monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity.

Thankfully, the question in the subject line is not so alien today as it was in the mid 1990s when my Strategic Management instructor used that as a lecture topic.  I was in the same boat then as many reading this today, with my reaction somewhere along the lines of How can you even ask that?  Of course they are bad!  They destroy the competition in the marketplace!

He, being a great lecturer, listened to a few of our comments and then launched into a quick destruction of them all: monopolies are short lived and competition destroys them.  Barriers to entry eventually disappear with new innovations and alternate products.  Of course, the lecture was much longer than that.

Now, there has been this lie spread through non-business academia and the mainstream media that once a monopoly is established, nobody can compete with it any more.  The consumer is a captive slave of the monopolist and that is that until the government does something.  As usual, the poets and news readers get this as wrong as one can possibly get anything wrong.  The persistent monopoly exists because of the intervention of government, not a lack of government action.

Need a few examples?

One often cited is Standard Oil of New Jersey.  The way it is told by Professors of History is that Standard had taken over the oil business (omitting that it was primarily kerosine, a replacement for whale oil in lamps, and a replacement for coal fired engines) and was gouging consumers.  They beat their competitors to a pulp and ran the show from derrick to home.

In reality, Standard had about 20% of the refining capacity by the time their case came before the United States Supreme Court and gained that through buying out their competition.  Some monopoly, huh?  By the time the case got to court, crude oil and refining competitors were emerging in the Western States and Getty (the primary shareholder) was boycotting those States because they were not giving him favorable deals to expand Standard to that part of the country.

Another falsehood in this Liberal Arts Department fable is that Standard owned oil fields.  In fact, they did not own a single oil well and were delighted when suppliers undercut each other on the price of crude.  When the government "broke them up" they were "divided" into different firms, all with the same owners with the same proportion of ownership as Standard of New Jersey.  All the government did was add inefficiency to the mix.

In reality, Standard had a short lived spike in market dominance that was going away through competition and a lack of government support from Western States.

The AT&T story is a study in the other half of the monopoly lie.  The story goes that "Ma Bell" (American Bell Telephone Company) created and protected their monopoly on voice telephone service through various sorts of dastardly acts and they thwarted government action to break them up until the feds were finally able to break the monopoly in the early 1980s.

First, the only reason that "Ma Bell" had any monopoly at all was because the federal government granted them one, as a national utility, under the Franklin Delano Roosevelt administration in 1934.  In spite of being granted a monopoly, the US Justice Department decided to muck around and make some headlines for themselves in the 1950s and got the monopoly throttled back to 85% of the US market, along with restrictions on their foreign business.

By the 1980s, the American Bell System had had enough and asked the government nicely to become a "regular" company and compete without the umbrella of government monopoly power.  The agreed settlement resulted in a breakup of the firm into regional operating companies and an explosion in innovation and profit due to normal competition.  Those profits came in spite of overwhelming persistant government regulation that continues to this day.

Note also, in both of the above examples, National Socialist regimes were behind all of the government meddling with businesses that would have succeeded just fine with normal competition.

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Now for a few "monopoly" examples that should make anybody laugh: AOL, Netflix, Walmart (also accused of being a 'monopsony', NBC, Microsoft, and IBM.