Monopolies and oligopolies are types of market structure where one (mono-) or a few (oligo-) firms hold extraordinary market power, preventing competition in the marketplace. They are both forms of imperfect competition, a situation where the firms involved in a market have power over the price which they set for their products, may differentiate their products from each other via marketing and advertising, and are sheltered from competition by barriers to entry into the market. Monopoly is a case of imperfect competition where a single producer has the dominant position and is the price-setter in the market, while oligopoly refers to several firms dominating a market in which they all sell comparable goods.
What is a monopoly?
In economics, a monopoly is a firm which has no competitors in its industry. This position gives the monopolistic firm certain advantages – notably, it can choose to manipulate the balance between supply and demand by reducing the number of products it releases to market, in order to raise prices and maximize profits. Using its monopoly power, the firm can also prevent competitors from entering the market. These barriers to entry may include economies of scale, locational advantages, sunk costs, ownership of inputs, or government restrictions. In reality, we rarely see cases that correspond perfectly to this model of a monopoly, however, there are cases where companies wield significant market power which allows them to squeeze their competitors out of the market and thereby maintain a dominant position.
Historically, firms which have first-mover advantage have been able to establish themselves as the central firm in an industry, such as in the 19th century United States where companies such as Standard Oil and Carnegie Steel consolidated their market power as their industries grew to national prominence. Some commentators have likened the development of social media and technology companies in the 21st century to these earlier monopolies, however, the fact that these companies often derive their revenues mostly from advertising rather than selling their products makes them significantly different.
What is an oligopoly?
An oligopoly differs from a monopoly, in that it is multiple firms rather than a single firm that dominate an industry. In an oligopolistic market, no one firm has sufficient market power to prevent the others from competing. In many cases there may be an element of collusion among oligopolistic firms, as they decide it is more profitable to segment a market and protect their market shares than to compete with the other companies in the industry. These arrangements, known as a cartel, prevent new entrants into the market and thereby protect the incumbent oligopolies. These cartels may fix the prices of their goods and compete instead on the branding and marketing of their products, or to divide a market regionally, allowing each oligopolistic firm to have an effective monopoly in the region where they are dominant.
Oligopolies are much more common in modern economies than monopolies, with both national oligopolies such as mobile phone providers, supermarkets, and commercial banks, as well as more international oligopolies such as music streaming services and the market for smartphones. Oligopolies may have harmful effects for consumers, as they can raise prices and stifle innovation, although the element of competition that still exists among oligopolistic firms means that these effects will be more moderate than in a monopolistic industry.
Natural monopolies
Natural monopolies occur where, for a certain product or service, there are prohibitively high costs of entry or strong economies of scale, meaning that it is not possible for firms other than the founding firm to enter the industry. These usually occur in cases of public goods and energy utility companies, which are often taken into public ownership due to the monopolistic character of the industry. Where these industries are not nationalized, they are often subject to strict regulations that are put in place to protect consumers.
Natural monopolies are viewed differently to other monopolies, as their inherent characteristics mean that introducing competition into the market may in fact be inefficient compared with keeping the industry as a monopoly and regulating it. Whereas other monopolies may gain their dominant market position through unfair or anti-competitive business practices, natural monopolies occur due to the characteristics of the product or service being sold. This is particularly the case with public goods such as railways or utility companies, where the start-up costs associated with these enterprises is huge, while there is little or no marginal benefit to introducing competition into the market (for instance, by having two separate railway lines going between the same places).
Antitrust law and regulation
Due to the negative impact which monopolistic or oligopolistic firms can have on market competition and consumer welfare, in most countries there are strict laws which regulate firms’ market power, known in the United States as antitrust law and in other countries as competition law. Modern competition laws can trace their history to the late 19th century, when the development of large dominant firms (‘trusts’) in a number of industries became a concern for lawmakers. The U.S. congress passed the Sherman Antitrust Act in 1890, one of the first modern antitrust laws, which prohibited anti-competitive practices and the formation of cartels or monopolies.
The early 20th century marked a high point for the use of antitrust laws to break up companies, with the Supreme Court’s 1911 decision to break up Standard Oil into 34 smaller companies being perhaps the most famous decision in competition law history. Since the 1970s, an interpretation of antitrust law based on neoclassical economics has become more common, with some practices which were earlier viewed as being anti-competitive now being ruled legal in Supreme Court cases. This approach to competition policy has been criticized by some practitioners for allowing higher market concentration in recent decades, particularly in growing industries such as technology, digital services and social media.
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