What is a Monopoly?

A monopoly is an unhealthy situation in the market in which a single company is the only option in a specific sector or area, which undermines the principals of a free market.

In a free market, there is competition which keeps the prices and the quality of products as good as they can be for the consumer. The consumer will therefore receive the most value, and society will be in its best possible position, when the needs and demands of consumers are being addressed by several companies attempting to outdo each other to earn the consumer’s business.

In a monopolistic situation, there is no competition and the costs to enter the market for a new competitor are too high. The monopolistic company will be able to push prices higher and the quality of products lower, since there is no alternative for the consumer. The company may be vertically or horizontally integrated to an extent that no other companies have a chance to compete in the market.

As such, mergers and acquisitions activity as closely monitored for antitrust violations. The US Government enacted antitrust laws, which are called competition laws in other English-speaking countries, to prevent monopolies from forming or wielding too much economic power. Over time, the government has stepped in to break up many attempts at monopoly formation using the Sherman Act of 1890 and the Clayton Act of 1914.

Notable in recent history, Microsoft was sued under antitrust laws in 1999, but due to a reversal in the Court of Appeals, they were able to continue business as usual. Apple was found guilty of price-fixing e-book sales in 2013, despite repeated appeals that failed overturn the ruling. They are required to pay $450 million.