It's more than a bored game:
one great disease of economies
What is a monopoly?
A monopoly is what happens when a single company or organization gains effective control of an entire market. Exactly how much control is required for a monopoly to exist depends on opinion. Some would say that as little as 40% control of a market
What's so bad about a monopoly?
For those in control of a monopoly it is possible to do a variety of nasty tricks that simply can't be done in a healthy, competitive market. It's relevant that many government laws about monopolies involve the word "anticompetitive".
One of those tricks is to adjust the prices of goods across the board to make more profit for the company than could possibly be made if there were competition. Another related trick is to destroy any remaining competitor by adjusting prices to take a loss in the region where the company still has to compete (financed either by the extreme profits elsewhere or by savings from such profits) so that any smaller competitor doesn't have the resources to stay in business. Then, once the competition is defunct, prices can go back to the level that produce huge profits.
The net effect is that for any individual who has to do business in the market the monopoly controls, the most profitable action is to simply do business with the monopoly on its terms. The best imaginable condition for each of them, however, is that the monopoly never existed.
Types of monopolies:
- Product Seller's
monopoly: This is the condition where the majority of the
supply
of a particular product comes from a single company or
organization. In the areas where this company has monopoly power,
they can raise the price to whatever level the market will bear.
If they did not have a monopoly, the market would not bear prices above
what the next-cheapest competitor is selling the product for. In
the case of a seller's monopoly, however, the market's next alternative
is usually to somehow do without the product. This could be as
simple as substitution: if the price of pens is too high, eventually
most consumers will simply use a pencil. The next chosen
alternative could, however, be to buy no product at all. If you
don't want to pay the full price to see a new movie in the theater, you
might choose to simply wait and not see it (until it is cheaper: to
rent the video). A more moderate example of the above is that
consumers might moderate their use of a particular product. If
gasoline is too expensive, they might drive less (and thus need to buy
less gasoline).
- Product Buyer's
Monopoly: This is what happens when there is a healthy
market
trying to produce a product, but only a single company offers
reasonable prices for the product, and thus are the primary
buyers. The usual result is that producers of the product are
paid a bare minimum price for it, barely sufficient to remain in
business. A possible example of this sort of monopoly is any sort
of agricultural product. If only one business in an area
maintains slaughterhouses, they could maintain an effective buyer's
monopoly on cattle. Ranchers would only receive whatever amount
of money the monopoly saw fit to give them, making little if any
money. Since most of them would be in debt to continue or expand
their operations, it would be difficult enough to switch businesses
that the situation could continue to exist at least for a time.
- Service Monopoly: If
only one company provides a particular service, it can become quite a
lot like a seller's monopoly. If only one company in an area
offers high-speed internet access, then they might well increase their
prices dramatically to turn a profit.
- Government-granted
Monopolies: With so many bad things mentioned about
monopolies, why in the world would a government legislate such a thing
into existence? For a good reason: to try to change people's
behavior. Currently, most governments have in place systems for
granting copyrights on new creative works, and patents on new
technologies. A copyright gives an exclusive right to,
well... make copies of a work, for however long the copyright
lasts. This is to give the holder of that copyright money in
proportion to how popular the work is, and thus to encourage people to
make more and more popular works. Similarly, but not identically,
a patent grants an exclusive right to make anything using a particular
technology (even if it's re-invented without seeing the original) for
the time span of the patent. Patents on world-changing
technologies, such as popular new medications, can give truly huge
profits to their holder. Any patent falsely granted, or granted
on something that would have been invented soon anyway, means that a
society has given away a huge boon (the ability to have a healthy
competitive market in a new product) in exchange for nothing.
This is why most patent systems have at least partly effective systems
in place for making sure an invention is both new and non-obvious
before giving a patent on it.
- Labor Unions -
(Attempted) Labor Monopoly: Labor unions are groups of
workers who bond together for negotiating purposes. The idea is
that while a single laborer is not all that vital to the success of a
business, all of them together are absolutely vital. Laborers
therefore join together to get a larger pool of labor. While
monopolies as a rule tend to be bad, labor unions tend not to be as
damaging because they usually occur in industries where the employers
are largely monopolistic themselves. While the ideal may be lots
of laborers and lots of employers in competitive markets, a single
employer negotiating with a single labor union is still better than the
worst alternative: a single monopolistic employer and a competitive
market of laborers. At least with two gigantic entities it is
possible for both to get a fair shake.
Not necessarily. It is quite common (Even Adam Smith noted it in The Wealth of Nations) that people in a single business might work together to behave as though they were a single organization, at least with respect to their dealings with suppliers or customers.
A relatively legitimate example of this is the cartel. As an example cartel, I will use OPEC; the Organizaiton of Petroleum Exporting Countries. The idea is that the countries which sell oil overseas will get together to try to raise the price of that oil, so that they all make more money than they otherwise would have. As long as everybody agrees to reduce their supply of a commodity to a certain level, then the price goes up and everybody is able to make more money per unit shipped (and thus the profit margins improve dramatically). The trouble with any large and public cartel is that any member can make a lot of money by disobeying the rulings of the cartel. Each of them might make a little bit more by obeying the rules, but any individual member could make a lot of money all at once by disobeying the rules and producing a huge quantity of the product. This is the notorious instability of cartels.
The more shady side of companies colluding to improve prices (an improvement from their perspective, at least) is the idea of secret price agreements. If all of the purchasers of a product agree secretly to keep the prices they will pay for it artificially low, then they can all get their product cheaper. The book Fast Food Nation by Eric Schlosser contends that this is what has been happening to the livestock industries in the United States in the years just after 2000; livestock processors don't pay much for their product, so independent farmers go broke trying to provide the animals.