When the ancient Israelites faced the Philistines, few doubted which champion would win. After all, Goliath was bigger, stronger and more experienced in warfare than the young rival. The odds were certainly stacked against him, but armed with his skill, his faith and superior technology, David emerged the victor.
Not every company that tries to take on a monopoly will emerge as David did. Breaking or circumventing a monopoly is difficult and can often take many years, but it is certainly not impossible. There are different types of monopolies, and every market has its own challenges. However, with skill, faith and — more often than not — superior technology, it certainly can be done.
The most common monopoly definition is a firm that completely controls the market share for a product or service. In practice, however, when one company owns an extremely high share of the market, this too can be called a monopoly.
Monopolies and Economics
In a perfect market economy, all companies would produce similar products with prices based on demand, not market share. New companies could freely enter the market with the same access to resources and labor as anyone else. Of course, there is no such thing as a perfect market economy.
When a company has a monopoly, that company produces all of the goods or services in a market without facing any significant competition. Because of this, the company is free to charge any price it wants. There are actually few true monopolies in the United States. However, the U.S. Department of Justice tends to use a wider definition in that a monopoly can be any company that has a significantly high share of the market.
In some cases, a government may encourage a monopoly by enacting laws that prohibit or limit competition. This is called a legal monopoly. The second kind of monopoly is a natural monopoly, which can arise by any means other than legal limitations.
Understanding Legal Monopolies
For select products and services, the government may prohibit or limit competition through legislation. Many states and cities, for example, do not give their citizens a choice in from whom they get their water or electricity. In most cases, prices are also regulated by the government.
Throughout history, governments have given monopolies on things like salt, sugar, iron and alcohol. In the 17th century, the British East India Company and the Dutch East India Company were both given monopolies on trade by their governments. In the U.S., some monopolies are owned by the government, such as public utility companies and even fire departments (which were once private companies competing for business in many cities).
Until 1982, AT&T operated as a legal monopoly in the United States because the government felt it was important that everyone should have inexpensive, reliable telephone access. In the past, railroads were given monopolies to connect different regions of the country, and airlines were given monopolies after that.
Patents, Trade Secrets and Intellectual Property
In the United States, patent laws guarantee companies a monopoly over a new innovation for a period of 20 years. The purpose of this is to encourage innovation. Pharmaceutical companies, for example, must often invest many years and millions of dollars in research to develop new drugs and would be reluctant to do this if they were not guaranteed a monopoly on that drug for some period of time.
Laws regarding trade secrets and intellectual property can also protect companies from competitors. The recipe for Coca-Cola, for example, is not protected by patent laws but has been deemed a trade secret, meaning that no one can steal the recipe and begin copying the product.
To a lesser extent, trademarks and copyright can also protect companies from competition. Nobody else can make Heinz soup, use Nike's swoosh logo or republish the Harry Potter novels. If one did see these as monopolies, the way to get around them would be to make your own brand of soup, create a more interesting logo or write your own novel. Similarly, a way to compete with a company owning a patent would be to create a product with different engineering or a different design that achieves similar results.
Breaking Legal Monopolies: Deregulation
The only way to legally break a legal monopoly is to pressure the government to change the law and remove restrictions in a market through a process called deregulation. This can be due to public demand, a change in technology or lobbying by companies that want to compete in a market. Often, it is a combination of all three.
When AT&T had its monopoly on phone services, phone calls relied exclusively on a network of copper wire and switching stations. With the advent of microwave and satellite communication services, there was no longer a rationale to limit long distance services to just one company. The company's monopoly in local service was also due to changes in technology with the introduction of cellular phone services.
If your company has a way to provide the same product or service that a legal monopoly offers and if you can do it more cheaply or more efficiently, you may be able to put pressure on the government to deregulate the restrictions that currently support that monopoly. You would need to coordinate your efforts with a combination of government lobbying and public relations as well as marketing and advertising to your potential customers to create strong public support for deregulation.
Circumventing a Legal Monopoly: USPS
Circumventing a legal monopoly is one way to compete in a market without breaking the law. The U.S. Postal Service is a prime example of a firm that has a legal monopoly. In fact, USPS has two monopolies, as explained by Richard Geddes, a professor at Cornell University and the director of the Cornell Program in Infrastructure Policy.
The first, Geddes explains, is that only USPS is legally allowed to deliver anything defined as a "letter". The second is that only USPS is legally allowed to put anything in your mailbox. Anyone else using your mailbox, he explains, is breaking federal law.
Parcels, however, were never defined as part of the USPS monopoly, which is an area in which companies like UPS, DHL, FedEx and Amazon now compete. None of these other companies, however, were allowed to deliver letters until FedEx found a way to circumvent the monopoly by making a case that there was a demand for express document delivery for law firms and other professional services and threatened to sue USPS. USPS settled by allowing an exception in their monopoly for “extremely urgent material.”
Understanding Natural Monopolies
Natural monopolies can arise for a variety of reasons but usually depend on economies of scale. An example of this is when a company can mass produce products at a very low cost, especially in a limited market. New companies entering the market are unable to compete because they can't match the scale of production and therefore can't offer the same low prices.
When a company has already invested in an extensive infrastructure, it can become a monopoly because the cost of each new customer becomes minimal. For water, electricity and cable TV providers, adding new customers is extremely inexpensive because it's just a matter of connecting them to the existing infrastructure.
Control of resources can also result in a monopoly. For example, in the 1930s, aluminum producer ALCOA controlled most of the bauxite available in the United States. Other companies could not get enough of this vital resource to compete.
How Governments Break Monopolies: Antitrust Laws
Monopolies in themselves are not illegal in the United States. Companies are allowed to make high profits by patenting new inventions and by producing superior products. However, U.S. antitrust laws are designed to block a range of behaviors by companies that would reduce competition.
A prime example of this is government restrictions on mergers. For a few years, the federal government blocked a proposed merger between T-Mobile and Sprint on the basis that it would reduce the competition in the telecom industry to only three major companies. It wasn't until October 2019 that the merger was given the green light, when Dish Network was brought into the deal to replace Sprint as a new fourth competitor.
U.S. antitrust laws also prohibit companies from agreeing to fix their prices, rig bids or share or divide markets between themselves. An example of this is when the government prosecuted an international cartel manufacturer in 1999 that had rigged its prices. The result was a fine of $500 million and a top executive being imprisoned for four months.
Breaking Monopolies: Netscape vs. Microsoft
In the face of a natural monopoly, one way for competitors to take action is to petition the government to use its powers to break it up. One of the most famous cases of this in recent years was when Netscape and other software companies took on Microsoft in the late 1990s.
Specifically, Microsoft had engaged in anti-competitive behavior by pushing its own web browser, Internet Explorer, on manufacturers. Microsoft had threatened computer manufacturers that if they installed the Netscape web browser on their machines, then Microsoft would refuse to sell them Windows.
The company was also accused of giving away software and bundling it with its operating system in order to starve its competitors out of business. Netscape and other companies protested this to the federal government, and after a trial in federal court and an appeal, Microsoft agreed to end its anti-competitive practices in 2002.
Circumventing Monopolies: Tesla Motors and the Big Three
For most of the past century, it was common knowledge that the U.S. car market would be dominated exclusively by three automakers: Chrysler, Ford and GM. There was simply no room in the market for a fourth company. After all, John DeLorean had quite famously tried back in the 1980s with his "Back to the Future" DMC DeLorean and failed spectacularly within a couple of years.
Then, along came Tesla Motors. A large part of the company's success is that its founders never intended for it to be a competitor in the established car market. They wanted to create an electric car that would be an alternative in a market that was untapped and mostly outside the radar of the mainstream car manufacturers. Incorporated in 2003, Tesla Motors launched its first luxury electric car in 2013.
Since then, the company has grown, releasing only one model at a time and incrementally increasing its market share with more affordable vehicles. In 2019, Tesla Motors has 80 stores in North America, Europe and Asia. While the future is always uncertain, its approach so far has certainly worked, penetrating a market that most believed could not be pierced and making its name synonymous with quality electric vehicles.
- Investopedia: Perfect Competition
- BC Campus OpenText: Introduction to a Monopoly
- BC Campus OpenText: How Monopolies Form: Barriers to Entry
- Investopedia: Legal Monopoly
- BC Campus OpenText: Regulating Anticompetitive Behavior
- CNET: Feds Sign Off on $26 Billion T-Mobile Sprint Merger. Now What?
- Investopedia: The Story Behind Tesla's Success (TSLA)