Legal Near-Monopolies

Near-monopolies that are formed due to consumer behavior and certain government policies

What are Legal Near-Monopolies?

To find out about legal near-monopolies, let’s start by discussing monopolies. A monopoly is an organization (typically a company) that is the singular seller of goods or services in a given market. The organization takes over a space in the marketplace, making it impossible for other organizations to come in and also sell their products and services.

 

Legal Near-Monopolies

 

As long as nothing steps in to stop a monopoly – such as the federal government – the monopoly enjoys free reign to set prices for their goods and services. Typically, a monopoly sets prices that yield the most profit.

Provided that a monopoly is more profitable than competitive organizations, it’s highly likely – according to economists – that entrepreneurs will enter the marketplace to take advantage of high returns. It gives the monopoly competition and drives prices down, effectively knocking the monopoly out of power.

 

 

Summary: 

  • A monopoly is an entity that dominates a market, making it virtually impossible for competitors to enter.
  • Monopolies are illegal because they prevent competition and drive up prices for consumers; the Federal government has instituted antitrust laws to curb monopolistic operations.
  • There are near-monopolies – mega-corporations that enjoy dominance in a market while leaving room for competitors.

 

Understanding Legal Near-Monopolies

Monopolies are regulated by the Federal Trade Commission because they can raise prices without losing their market share. A straight monopoly is illegal, but there are some near-monopolies that are legal, formed due to consumer behavior and certain government policies.

Near-monopolies are companies that have moved into a space and have taken over a significant portion of the market share. Such companies are often very large. Also, they tend to diversify, making other products to help boost both market share and profit. While the companies leave some room for competition, they can virtually be considered monopolies.

 

Examples of Near-Monopolies

  • Anheuser-Busch: Controls about 45% of the beer market share
  • Intuitive Surgical: Developed the da Vinci robotic surgical system for use in hospitals to reduce incision sizes and blood loss; the release of the da Vinci X made Intuitive the dominant player in the market because of its lowered cost.
  • Sirius XM: When satellite-radio platforms Sirius and XM merged in 2008, they formed the mega-company that dominates the satellite radio space today. Competition exists with streaming platforms; however, Sirius XM is essentially the only satellite-radio option for consumers.

 

Disadvantages of Monopolies

When a monopoly takes control of a market, it hinders new companies from entering the space. With ultimate power, the monopoly can skimp on goods production and end up selling defective or useless products. Monopolies can also prevent product exploration and development.

Because monopolies ultimately poison a market and drive up prices for consumers, the government steps in with legislation and policies that help control organizations, preventing them from becoming monopolies.

Authorities pass antitrust laws and regulations to curb monopolistic tactics. The regulations are intended to stop practices that restrict trade, keeps consumers safe, and helps keep markets open, so competition is possible.

 

More 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:

  • Barriers to Entry
  • Demographics
  • Duopoly
  • Oligopolistic Market

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