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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 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.

 

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 in a (legal) 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 resources below will be useful:

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

Financial Analyst Certification

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