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Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.
Think about the last time you played the famous board game Monopoly. What was the objective of the game? Of course it was to win, but how did you win? Whichever player ultimately controlled all of the properties on the board won the game because they had achieved a monopoly on the real estate market of Atlantic City, New Jersey. Through this famous game, the Hasbro toy company has taught millions of players what a monopolistic market looks like. When a single entity - a player in the game or a firm in the real world - controls an entire market, a monopoly exists.
Generally speaking, consumers and regulators don't like monopolies. To understand why, think back on the game. What does it mean once someone has won the game, or at least has a commanding lead? It means they have all the power. They get to start setting prices, and if someone can't pay, that person loses. That power is all fun and games in the family room, but in the real world, that much pricing power can be dangerous, especially in the markets that supply important goods and services.
Try to think of some examples of a monopoly in today's economy. Before you do, it should be noted that while a true monopoly means there is a single producer in the market, most regulators and economists consider a monopoly an industry that has a single firm large enough to set prices without impacting demand. Any firm can set their own prices, but most of the time, if those prices are too high, consumers don't pay them and the firm either has to lower prices or shut down. In a monopoly, consumers just have to pay whatever the controlling firm wants, since they are basically the only game in town.
So, back to the guessing game - what monopolistic markets can you think of? It's hard to think of a good example of a pure monopoly, primarily because they are discouraged, and if a U.S. firm gets too close to a monopoly, the government discourages them and puts regulations in place to limit their growth. But, that doesn't happen all of the time.
The U.S. does have some industries that are given a pass when it comes to holding a monopoly. Can you think of any? There are plenty of places to get gas. Plenty of places to buy a car. Plenty of places to watch movies. But, if you have to pay your own bills, think about your power bill. Did you get to shop around for a firm to provide your electricity, or were you told which firm you had to use? What if that firm was allowed to double their prices? Could you stop using them and start using another company? Not usually.
How about cable companies? In the last two decades, satellite TV providers have become real competition for cable companies, but think about just the cable company. Is there more than one that provides service to your house? Probably not. Before a cable company invests in the infrastructure required to deliver content across the country, through a city, and all the way to your home, they want some assurance that their investment will pay off. Really, this makes sense; in fact, the same was true for telephone companies in the early 1980s until the Justice Department broke up AT&T into smaller, regional monopolies because they had grown so big and powerful.
These regional monopolies, monopolies that serve a certain geographic region, are acceptable because of their unique services and their connection to the public good. For instance, power companies need to access power lines and no one - not residents, not politicians, and not power companies - want to see multiple sets of power lines all around town just so the electric market is more competitive. While that may create a market that the sole producer can abuse, typically changes in utility rates require some sort of approval, so there are additional controls in place to ensure those monopolies don't hurt consumers.
In economics, you can never say never, but generally speaking, monopolies aren't good for competition, so they aren't good for consumers. As we discussed in this lesson, there are some important exceptions, which is why it's important to understand market dynamics and firm incentives before assuming monopolies are bad. By definition, a monopoly gives a single firm almost all power in an industry, but in some cases - like cable TV and electricity - without that power there's not enough incentive for the firm to exist. In those cases, consumers have the choice between buying from a firm that has a monopoly or not having that firm at all.
It's also important to remember that while monopolies may have significant market power, typically regulators still hold very legitimate power over the monopolies. When competition doesn't exist to protect consumers, antitrust regulation and agency watchdogs can do that.
So, the next time you have your friends over to play monopoly and you take a commanding lead, remember the power and responsibility that comes with being the sole entity that has all the power and give your friends a break on their rent!
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Economics 101: Principles of Microeconomics11 chapters | 132 lessons | 18 flashcard sets
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