What Are Monopolies and Why Are They Bad?

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Aside from the board game, a lot of people may not really know what a monopoly is. They make their way into the news once in a while, but what does it really mean when something becomes a monopoly and why do we care? Everyone says they are bad, but why?

Actually, the board game is a great way to start understanding what monopolies are and why they become an issue. The board game is actually based on the monopolization of various industries that occurred in the late 19th and early 20th Century. Indeed, the character from the game, Rich Uncle Pennybags, is said to be influenced heavily by banker and financier of the monopoly tycoon era, J.P. Morgan. The game is based on real estate purchases, but the concept transfers to well to other businesses. As a player acquires more pieces of a particular sector of the board, they are able to charge higher rents for those who land on their properties. The point of the game is to grab every square available and keep increasing one's own revenues while attempting to bankrupt everyone else.

In the real world, monopolies work much in the same way. As a company acquires a larger and larger market share, they are able to exert unnatural control over the market. No longer does the principle of supply and demand apply, because the monopoly controls all or most of the supply, so if someone wants the product or service they often end up having to pay an inflated price to have it.

The practice of monopolization became common in the late 19th and early 20th century when oil, steel, and trains famously became monopolized by John D. Rockerfeller, Andrew Carnegie, and Cornelius Vanderbilt, respectively. There were a number of other tycoons and monopolies in this time, and their influence on not only the free market but on politics became significant. As a result, a number of laws eventually came into effect to prevent these companies from exerting such levels of control.

The first was the Sherman Antitrust Act of 1890. It was aimed at preventing the anti-competitive behavior typical of organizations operating in a monopoly. The law attempted to prevent the artificial raising of prices by restriction of supply. It still allowed for “accidental” or “innocent” monopolies achieved solely by merit, but precluded syndicates from working together to control market factors. In other words, the Sherman Act protects not the players, but the competition itself.

The Sherman Act was followed by the Clayton Act and the Federal Trade Commission Act, both in 1914. These Acts restricted the formation of cartels and prohibited other collusive practices which could restrain free trade. They also restricted mergers and acquisitions that would lead to a concentration of market power in a limited number of hands, lessening competition, and the formation of monopolies.

In recent years, monopoly and anti-trust laws have applied in a number of industries. Famously, Microsoft had a number of run-ins with the Department of Justice in the 1990's and 2000's regarding its trademark computer operating system, Windows. The Bell Telephone Company had a similar legal issues and was even forced to break up its operations into a number of “baby Bells” after it was determined to have become a monopoly on the telephone industry. A number of other technology and software companies have faced similar legal issues.

Fortunately, in the modern Internet age, monopolies are becoming harder to form as there is more available market share for new players and more ways for them to reach customers. Still, they are possible. If you believe you have run into a monopoly, either as a competitor or as a customer, you should contact a local attorney for assistance in determining whether you have a claim and how best to go about pursuing it.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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