Monopolization Meaning Explained Examples How To Prevent

Monopolization Meaning

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Monopolization can be done through gaining, retaining, or exploiting a market or commodity monopoly, even if it is locational. In the structure of an industry, certain rivals will become larger and may eventually form monopolies. It consists of two components: position acquisition and the aim to dominate and exclude competitors.

Key Takeaways

Monopolization implies any indulgence in gaining, retaining, or exploiting a market to prevent others from any market share. It can result in exclusive dealing, complete market control, or commodity monopoly, even if it is locational.Monopolization schemes and conspiracies are prohibited under Section 2 of the Sherman Act by the Antitrust Division of the U.S. Department of Justice.Stringent regulations, discouraging monopolization tactics, efficient knowledge diffusion, and collective understanding could prevent monopolization.

Monopolization Explained

Monopolization attempts to reduce competition and establish supremacy in the market. This is unhealthy for a market as it can lead to price hikes and unfair practices. Hence, the antitrust laws prevent a potential company from engaging in activities that unduly restrict competition by establishing or sustaining monopolistic power. In addition, section 2 of the Sherman Act also prohibits monopolization schemes and conspiracies.

The concept of allocative market inefficiency is very relevant in the understanding concept of monopolization against that of a competitive market. When an industry is monopolized, price is not equal to marginal cost, and the concept of allocative market inefficiency holds true. Whereas if an industry is competitive, price equals marginal cost, and the condition of allocative market efficiency is met.

The inefficiency of markets is due to the monopolization of the industry/market. Firms are supposed to be internally efficient and produce at their production and cost frontiers under competitive conditions. However, most monopolistic positions have been connected with firms whose market share neared or surpassed 80 percent.

Estimates of the allocative, market, and inefficiency triangles, as well as the welfare, depend on the proportion of national income generated by monopolized industries, the price differential between competitive and monopolized industries, and the elasticity of the product’s demand. Using any acceptable estimates for these three factors yields estimates of allocative inefficiency that are extremely low.

The hypothesis of allocative inefficiency presupposes that businesses acquire and utilize all inputs efficiently. As a result, the “net marginal effects,” or the price and production differential between the competitive and monopolist options, remain. A lack of competition in monopolized industries might result in a few percentage-point price increases.

Graph Of Allocative Efficiency

Let us consider the following graph of allocative efficiency to understand the operating variable relationships of a firm engaged in monopolization.

In the above figure, the horizontal axis represents output, and the vertical axis represents the price. MC denotes marginal cost. Triangle XYZ represents allocative efficiency. The graph represents the pricing and output discrepancies between a competitive and monopolized industry (Jp-Kp and Jq-Kq, respectively), while JpXYKp represents monopoly earnings. In a monopolized firm, Marginal costs are way below the point of the maximum price charged. This clearly signals the onset of monopolization.

Preventing Monopolization

Monopolization is against the law; there are provisions under which it is punishable. Even then, at times, certain firms can monopolize a market. Let us look at the proactive steps and precautionary measures to prevent it.

The presence of network effects and cumulative inclinations toward competing standards can dismantle power-based structures like monopolization.Implementing a public policy to avoid power-based asymmetry, monopolistic industrial structures, and protracted standard/price conflicts. An antitrust lawsuit to splinter a company appears ineffective and inadequate for this purpose.In addition, tactics used by monopolization like discouraging entrance of other firms, unclear standards, incompatibility-inducing modifications to the standard (or, more broadly, control of standards), patenting of overly good ideas, etc.Mandate important criteria to be public or potentially managed by a neutral party.Developing governance and regulatory standards to promote the growth of private firms or public-private partnerships to build a marketplace (virtual or real) and support product certification, monitoring, and enforcement.Enforcing stringent regulations to prevent undesirable outcomes such as monopolization and ongoing deterioration of natural capital and ecosystem services. Governments will require a continuous role as overseers to maintain market equality in the ownership of public assets and prevent land management measures with unexpected negative effects on natural capital and ecosystem services.

Examples

Let us look at the following examples to understand the concept better.

Example #1

The U.S. economy is in the middle of a “concentration crisis” in which one or a small number of market-controlling businesses dominate the entire sector or industry. This has extensive negative repercussions, including harm to competition, wages, business development, and innovation. Hollywood is no exception in the same. It is not an open fact that Disney rules the movie industry; hence its development as a dominant force in the film business endangers the profitability of innovative independent films. Also, it places movie theatres under exploitative pressure, restricts the variety of films accessible, debases culture, and exacerbates economic and political injustice.

Example #2

A recent article by Mondaq elaborates how the Antitrust Division of the U.S. Department of Justice (DOJ) has declared a new emphasis on prosecuting attempted monopolization cases under Section 2 of the Sherman Act. It represents a substantial shift from former enforcement policies. Also, the article indicates that the Department of Justice has no intention of offering assistance or guidelines to the business community on these improvised criminal monopolization charges. Therefore, firms must intensify their efforts to comply with Section 2.

Criminal breaches of the Sherman Act may result in fines of up to $100 million for corporations and $1 million for individuals, or double the gross gain or loss resulting from the offense, whichever is larger. Also, entities are subject to a maximum of ten years in jail.

DOJ aims to utilize every possible instrument to encourage competition as monopolization results in a decline in consumer choice, posing a danger to democracy. Accordingly, DOJ considers charges under Sections 1 and 2 based on the allegation that the companies conspired to create monopolies and exclude rivals.