When people hear the word “monopoly”, 2 images tend to come to mind: either a cartoon man with a top hat, a cane, and a big white mustache or an evil corporation ruthlessly crushing any competition that dares stand in its way. The second image has some validity to it (not sure where that first one could have possibly come from), but an important detail to keep in mind going forward is that monopolies aren’t always a bad thing. When a monopoly is allowed to exist, it’s usually for a good reason.
What are monopolies and why do people not like them?
In the economic context, a monopoly is defined as a single company or group that owns all or majority of the market for a given product or service. So if Banana Corp is the only company selling bananas, they have 100% market share, making them a monopoly. In this example, because Banana Corp is the only seller in the banana market, there isn’t any competition.
This is generally a con as it can lead to high costs for consumers - Banana Corp has no incentive to lower their prices, because who else is there to buy bananas from? They’re the only sellers of bananas, so why not maximize profits by charging as much as possible?
Having only one seller distorts the natural laws of supply and demand, where companies are constantly competing with one another in order to attract more customers. How do they do this? In a competitive market, it’s done by lowering prices, offering better quality products, or some other mechanism that satisfies consumers.
But under a monopoly, all that competition (as well as the benefits that come along with it) are gone. But what if these benefits aren’t actually beneficial? Believe it or not, fierce market competition may not always be ideal depending on the industry.
So what are these “good” kind of monopolies?
When the average cost of production falls as a factory grows larger, then we have economies of scale. It occurs when the cost per unit of output decreases as the scale of production increases. Consider what it would take you to make one iPhone. To put together just one of them from scratch, it would be pretty expensive. Yet, Apple can use your budget that you needed to make that phone and instead make 100 phones. They may be making more phones, but their cost per unit (how much it takes to produce 1 individual iPhone) is far less than yours.
A natural monopoly exists when economies of scale encourage production by a single producer. A good example of this is your utility company. As the size of the powerplant increases, the cost for generating each kilowatt of electricity decreases. Take the iPhone example and apply it here - imagine each home in your neighborhood having to run their own power generator provided by their own power company. It would not only be inconvenient to set up and manage, but the costs of running it would be astronomical.
As a result, what usually happens is that multiple home builders will make deals with a single utility company for the sake of keeping costs down. However, this begs the obvious question: what’s stopping utility companies from jacking up the prices because they are a monopoly? In short, the government controls the price that utility companies are allowed to charge, thus encouraging low-cost production while allowing the utility companies to gain profit.
Only in very specific circumstances like these can the consumers actually benefit from a monopoly.
How do governments deal with these bad kinds of monopolies?
Antitrust laws are regulations put in place to prevent monopolistic practices and to ensure that markets remain competitive.
These kinds of laws have origins in the Roman Republic around 50 BC, where heavy fines were imposed on anyone deliberately stopping supply ships in order to protect the grain trade. Roman emperor Diocletian took this one step further by imposing the death penalty for anyone violating the tariff system (i.e. by concealing the scarcity of everyday goods).
Contemporary antitrust law, however, really began in 1889, when Canada enacted the first competition law of modern times, namely the Act for the Prevention and Suppression of Combinations formed in restraint of Trade (way to keep things simple). Only a year later did the famous Sherman Antitrust Act of 1890 come into effect in the US. As John D. Rockefeller’s Standard Oil empire captured a whopping 88% market share, the US Justice Department used the Sherman Act as their silver bullet and broke up Standard Oil.
Along with Standard Oil, the US government used the Sherman Act (as well as other antitrust legislation added over the years) to break up several monopolies, such as the American Tobacco Company and De Beers (which has nothing to do with beer - it sells diamonds). A famous modern case would be Microsoft.
In 1994, the company was accused of using its market share to prevent competition and maintain an illegal monopoly. In 1998, a federal district judge decided that Microsoft was to be broken up into 2 technology companies, but that decision was later reversed by a higher court. There were a few changes here and there, but Microsoft was once again free to maintain its original business practices.
What about Big Tech? Are they gonna be broken up?
There aren’t any definitive answers, but with the current state of affairs, most likely not for 2 reasons:
These companies may be the good type of monopolies. 90% of online searches take place on Google, but consider why. The Google search engine is free and more convenient than other options such as Bing or Yahoo. The consumer benefits from it. Same thing could be said for Amazon - their prices are among the lowest you can find anywhere online, and they’re sacrificing profits to keep them that way. Breaking up these companies may result in consumers having to pay more for the same product.
The US government has a vested interest in maintaining its technological power. The so called “US-China trade war” is a misnomer, it’s more of a “US-China tech war”, with both countries cutting off technology supplies from the other in order to get ahead (think back to the US government’s blacklisting of TikTok, managed by the Chinese company ByteDance). The US sees China’s technological rise as a threat and it’s been argued that breaking up Amazon and Google (both of whom are world leaders in R&D investment, AI, and tech incubation) would only weaken American influence.
For these 2 reasons, it’s unlikely that the Big Tech companies will be broken up anytime soon, which, remember, isn’t necessarily a bad thing.