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
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 monopoly is the lack of incentive to improve the product or service offered and a potential limitation of innovation. Legal 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 able to operate as a legal monopoly for the next seven decades. The rationale behind the government taking over AT&T was that the government believed that it was vital to have affordable and reliable phone services.
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 legal monopoly status, and the (legal) monopoly that AT&T held for seven decades came to an end in 1982.
- 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 in a (legal) monopoly is the lack of competition, which often leads to a lack of incentive to improve the product or service offered.
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 resources below will be useful: