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Legal Monopoly

A firm that is protected by law from competitors

What is a Legal Monopoly?

A legal monopoly, also known as a statutory monopoly, is a firm that is protected by law from competitors. In other words, a legal monopoly is a firm that receives a government mandate to operate as a monopoly.

Legal monopolies can be established through:

  • A public franchise
  • A government license
  • A patent or copyright

 

Legal Monopoly

 

Rationale Behind a Legal Monopoly

A legal monopoly is a situation in which the government grants a firm to be the exclusive provider of a good and/or service in exchange for the right to be monitored and regulated.

 

Recall the disadvantages of a monopoly:

  • Higher prices and lower output
  • Consumer exploitation and bullying
  • Poor quality and service
  • A potential limitation of innovation

 

A legal monopoly is able to remedy some of the disadvantages described above. Legal monopolies arise when a government deems that allowing a single firm as the sole service (or product) provider would be in the best interest of citizens.

In a legal monopoly, the government is able to regulate prices and provide the population with widely accessible services/goods, oversee firm operations, and ideally shift the monopoly to act in the best interest of consumers.

 

Major Disadvantage of a Legal Monopoly

As mentioned above, a legal monopoly rectifies a number of disadvantages in a monopoly. However, the biggest disadvantage behind such a monopoly is the lack of incentive to improve the product or service offered and a potential limitation of innovation. Monopolies don’t need to innovate on their products/services or provide exceptional customer service as there are no competitors in the marketplace.

 

Example of a Legal Monopoly

AT&T Corp. is a classic example of a legal monopoly, operating as one until 1982.

With the invention of the telephone in 1876 by Alexander Graham Bell, the firm the inventor formed (now AT&T) was able to establish itself as a monopoly by 1907. With the company’s service used by all citizens in the United States, many believed that the government would step in and take over AT&T to prevent the firm from gaining too much power.

In 1913, the Justice Department reached a settlement with AT&T, and the firm was allowed to operate as a monopoly for the next seven decades. The rationale was that the government believed that it was vital to have reliable phone services available nationwide.

In the 1970s, the Federal Communications Commission allowed limited competition in long-distance telephone services. In 1974, MCI and other long-distance service providers filed an antitrust lawsuit against AT&T. In 1982, all concerned parties reached a settlement, which required AT&T to divest its operating companies. With this, the government felt that there was no need for AT&T to maintain its monopoly status, and the monopoly that AT&T held for seven decades came to an end in 1982.

 

Key Takeaways

  • A legal monopoly is used to describe a firm that receives a government mandate to operate as a monopoly.
  • It is regulated and monitored by the government.
  • It acts in the interest of consumers by setting prices at an affordable range for the general public.
  • One major disadvantage with any monopoly is the lack of competition, which often leads to a lack of incentive to improve the product or service offered.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Absolute Advantage
  • Barriers to Entry
  • Duopoly
  • Monetary Policy

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!