MONOPOLY

the exclusive possession of a market by a supplier of a product or a service for which there is no substitute. In this situation, the supplier is able to determine the price of his product without fear of competition from other sources of his or substitute products. It is generally assumed that he will choose a price that maximizes profits. Monopoly as defined above is better termed absolute monopoly and is the opposite of perfect competition. Perfect competition exists when there are large numbers of sellers and buyers of a homogeneous commodity. Each seller accounts for a relatively small share of the market; he cannot, therefore, influence the market price by varying his output, and he cannot increase his price above the market price because buyers would shift to other producers. Although the concepts of absolute monopoly and perfect competition are useful for the purpose of illustrating economic principles, they seldom if ever occur in reality, where actual conditions range between the extremes of near monopoly and nearly perfect competition. In common usage the term monopoly is often employed to signify a state in which the degree of competition is restricted (but still present), whereas competition is used to denote a state in which competition is less restricted (but still not perfect). The precise dividing line between monopoly and competition used in this way is a question of definition. One generally accepted definition of monopoly is that embodied in British antimonopoly legislation, according to which a monopoly exists if at least one-third of the supply of a particular product or service is controlled by one enterprise or by several enterprises acting in concert with a view to restricting competition. Another name for a market in which a small number of sellers may each substantially affect prices and one another's behaviour is oligopoly. Oligopolists often tend to act in concert or, when permitted by law, to form cartels with formal agreements on prices and supplies. The arguments in favour of monopolies are largely concerned with efficiencies of scale in production, as for example the arguments that in large-scale, integrated operations, efficiency is raised and production costs are reduced; that by avoiding wasteful competition, monopolies can rationalize activities and eliminate excess capacity; that by providing a degree of future certainty, monopoly makes possible meaningful long-term planning and rational investment and development decisions. Against these are the arguments that, because of its power over the marketplace, the monopoly is likely to exploit the consumer by restricting production and variety and by charging higher prices in order to extract excess profits; and that, in fact, the lack of competition may well work against efficiency and lower production costs, with the result that the factors of production are not used in the most economical manner. It has been one of the principles of free-enterprise economic philosophies that monopolies are, as a general rule, undesirable and need to be strictly controlled. This is not to say that the advantages of monopolistic supply in certain specific areas have not been recognized; it is rather a case of ensuring that monopolies are restricted to these areas and, at the same time, taking the necessary steps to prevent them from exploiting the consumer. A case in point is the natural-gas industry. It is clear that a situation in which individual consumers could obtain their gas supply from competing companies, through competing pipelines and distribution systems, would be a highly wasteful form of competition. The idea of a single supplier, therefore, makes sense in economic terms. In order to prevent the consumer from being exploited, the monopoly's ability to control prices and supply needs to be restricted. This has generally been the view taken of firms operating as public utilities or in technical fields that invite a natural monopoly. Accordingly, most free-enterprise economic systems have an elaborate framework of laws and regulations aimed at controlling monopoly. The oldest and probably the most vigorous monopoly control legislation is represented in the U.S. antitrust laws. Consisting primarily of the Sherman and Clayton antitrust acts and the Celler-Kefauver Act, they are aimed at preventing agreements among suppliers, the effect of which would be to limit competition, and at preventing mergers between and acquisitions by and of firms, the result of which would be to lessen competition or to create a monopoly. The legislation provides for stiff civil and criminal penalties, and most administrations have tended to enforce the laws vigorously. In areas where monopoly is countenanced, such as in public utilities, a considerable degree of public control is exercised to ensure that monopoly power is not abused. In Great Britain the basic aims of the anti-monopoly legislation are similar to those of the United States, but much greater weight is given to the concept of the public interest. In the United States, any agreement or act that limits competition is regarded as undesirable, but in Great Britain and other west European countries such acts are accepted if they can be demonstrated to be in, or not to be against, the public interest. In general terms, the degree of monopoly tends to be relatively small in the United States; it is considerably more pronounced in Britain, France, and other parts of Europe, where among operating monopolies are a large number of state-owned enterprises.