Monopolies, Cartels and the Government

A monopoly is the exclusive control of the supply of a product, a service, or a commodity. Consumers do not have a choice if they decide to buy that product, service or commodity, they will have to deal with the monopoly and accept its terms.

How can a firm secure a monopoly? One way to do that is to buy all of its competitors, but this is easier said than done because that assumes the availability of enough credit for that company to buy all of its competitors and the acceptance of these competitors to be purchased. Another way is for the firm to compete hard on price and quality of service so it expands its market share and drives its competitors out of the market. Once the firm achieves market control it cannot arbitrary raise prices and abuse customers as many people may think, the reason is that if other investors see a good opportunity to make gains in that market they will enter the market and compete with that firm. The only way then for a natural monopoly to maintain its market dominance is to run an efficient business with an acceptable profit margin that does not encourage other investors to enter the market.

A Trust or Cartel is a group of producers who band together to control the market for a certain product, commodity, or service. Many people believe that a cartel can raise prices arbitrarily without a check, but in a free market new competitors will enter the market and challenge the cartel’s dominance if they see a good profit margin so the cartel cannot have total dominance on their market.

The free market protects the consumer by default because the producer will have to provide the best service in the most efficient manner to prevent either existing competitors or new competitors from taking that producer’s market share. In other words, the producers do not have a total pricing power over the consumers because competitors can always enter the market and provide a better price.

There is then no economic need for laws or regulations to control monopolies, trusts, or cartels but all countries have some form of Anti-Trust laws that regulate mergers and acquisitions. The main reason for the existence of these laws is to protect inefficient producers who fear being driven out of the market by more efficient producers. They run to the politicians and demand government protection to prevent market consolidation. They usually invoke protecting customers as one of the excuses for the intervention. Customers care about having access to good products with acceptable prices and having efficient producers in the market achieves that. Looking at the case of Standard Oil in the early twentieth century; we see that the price of oil products has dropped consistently every year of standard oil’s alleged monopoly and the consumers access to high-quality products increased. Breaking down Standard Oil only managed to serve the existing inefficient producers not consumers.

The only way a monopoly or a cartel can achieve total dominance is by restricting market entry and this can only be achieved through government power. Government created monopolies of utilities such as electricity and cable delayed the development of these fields and left the consumers without access to high-quality alternatives.

The existence of Anti-Trust laws is an example of how the government manages to create a problem while claiming to solve such problem.