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A
monopoly is a situation
where one firm has control
of a particular market,
such as the cell phone market. The
firm may be the only supplier
of a product or service, or it may
have a dominating market share.
In many countries a firm is said to
have a monopoly if it controls more
than 25 percent of a market.
The suggestion that monopolies
can cause the price of goods to be
higher than they would be if many
companies were supplying them has
existed for millennia. It dates back
at least as far as Aristotle (384–
322 BCE), who warned about the
problem in a story about the Greek
philosopher Thales of Miletus. The
public taunted Thales for practicing
philosophy, which they said was a
useless profession that made no
money. To prove them wrong, Thales
bought up all the local olive presses
in the winter when they were cheap,
and then—using his monopoly
power—sold them at very high
prices in the summer when the
presses were needed. In doing so he
made himself rich. For Thales the
moral was that philosophers couldMONOPOLIES
be rich if they wanted. For
economists the story warns of
the potential power of monopoly.Market power
In 1848, the English political
scientist John Stuart Mill published
his Principles of Political Economy.
It drew together much of the
thinking about whether a lack of
competition caused prices to rise.
The general view was that some
industries were likely to tend
toward a lack of competition.
This trend was created either
through artificial means, such
as the introduction of a tax by
governments on imported goods,
or through natural means, as a
consequence of firms growing ever
larger. Large firms had begun to
dominate the market because late
19th-century industry required
ever-increasing amounts of capital.
The firms that could grow by
capturing enough of the market to
finance the necessary investment,
had the ability to use their market
power to drive their smaller
competitors out of business and
to charge higher prices.IN CONTEXT
FOCUS
Markets and firmsKEY THINKER
John Stuart Mill (1806–73)BEFORE
c.330 BCE Aristotle’s Politics
describes the impact of
a monopoly.1778 Adam Smith warns of
the dangers of monopolies in
The Wealth of Nations.1838 French economist
Antoine Cournot analyzes the
impact on price of a reduction
in the number of firms.AFTER
1890 Alfred Marshall develops
a model of monopoly.1982 US economist William
Baumol publishes Contestable
Markets and the Theory of
Industry Structure, redefining
the nature of competition.Phone calls cost
more without
competition.Competition between
producers increases
output...... and drives
down prices.But monopolies, like
some telephone companies,
have no competition.They can produce less
and charge higher prices.