Monopoly and Economy: A Terrible Couple


The world economies have risen exponentially with new industries emerging and evolving. Modern economies such as the US, the UK and Germany have largely operated as capitalist economies. History exemplifies certain events that have transpired to uncover capitalism’s dark side which allows the concentration of market power in certain hands.


Capitalist economies have sometimes led to the emergence of monopolies, which is a business entity that is the only provider of a good or service and enjoys competitive advantage and tremendous market power. Companies acquire the advantage of huge market power and influence through vertical or horizontal integration. Vertical integration enables companies to take complete control over various production stages of a product. Horizontal integration is a strategy whereby companies acquire or merge with another that operate or work in the same domain to increase market power and share.


Monopolies are the only sellers of a good or service which means that they can fix any price they want to. These prices can be driven as low as the company wants to, to drive out any competitors trying to enter the market or shoot up the prices to increase their profits at the expense of exploiting consumers. This feature of monopolies indicates that they possess the ability for price-fixing, giving them enormous market power. The Organisation of Petroleum Exporting Countries (OPEC) comprises 15 member countries, mostly concentrated in the Middle East and African countries, is regarded as a dominant organisation and one that has monopoly powers in deciding the supply of crude oil. An oil crisis ensued in 1973 after OPEC withheld the supply of crude oil to the US, UK, Japan and other countries due to political reasons resulting in a 300% rise in oil prices in the US. The inelastic demand for oil and petroleum meant that consumers did not have any substitutes and had to fall prey to the disruption in the world economy. This also created a rare situation for cost-push inflation, which occurs when the supply for a good or service changes but the demand remains the same. The short and long term impacts of the oil crisis were damaging to global politics and the world economy. This incidence shows the extent of control and market power monopolies can enjoy to disrupt the world economy.


Since monopolies have little to no competition, it gives companies barely any incentive to innovate on their technology or business strategies. An unbalanced market skewed in the favour of the monopoly has already been created for their goods or services. The lack of competition leads to monopolies providing goods inferior in quality and not investing in research and development. Rather, they tend to drive up their prices and channel the revenue to maximise their profits. Regardless of the dominance, it does not mean that monopolies would never invest in innovation at all because then, certain competitors might seize the market and threaten the monopoly’s power.


To make use of monopoly power, governments might channel the highly concentrated market power to its advantage by observing high economies of scale. This ensures that sales can be increased while keeping average costs minimum leading to effective operational costs. Utilities, for example, create or maintain infrastructure for public services. For electricity production, it is tough for competitors to enter the market since it is very expensive to make new electric plants or dams for electricity supply. Governments regulate such monopolies to ensure protection for consumers.


Another aspect of monopoly power is monopsony, whereas, in a monopoly, a single entity controls the supply of a good or service, in a monopsony, a single buyer controls the demand for a good or service. Monopsony’s exploitative practices might exceed so much that it becomes illegal. An example of a monopsony can be seen in the labour market where certain powerful firms are able to make profits by paying low wages to their employees. Classical economists might suggest that such employees should turn to another employer where they can be paid more, but if it is a dire situation for an employee and they cannot get out of it, classical economics would not make a lot of sense. Certain situations arise where workers have to accept low wages such as when there is only one employer in a small town and the worker has nowhere to go. Monopsony power might take advantage of such situations and tend to make profits for themselves.


To keep monopoly’s unfair practices in check, the government has put in place antitrust laws that limit their control. Antitrust laws apply to every business and industry to ensure fair competition in the market. This prohibits them from practising exploitative means to gain market power such as price-fixing or mergers and acquisitions. In the 1980s, Microsoft was growing fast and was one of the world’s most successful software companies. The company’s rising presence threatened some officials and antitrust charges were pressed following which the case was brought to court. The government claimed that Microsoft prevented consumers from downloading other software on computers operated by Windows. After a long process, the court announced that Microsoft violated some of the antitrust laws and it was made to agree to share computing interfaces with its competitor companies. Giant tech companies like Microsoft are also required to follow certain regulations, which if broken would lead to heavy fines and penalties.


A similar debate erupted in September 2021, when Epic Games, a video game and software developer that created Fortnite, took Apple to court. Epic games claimed that the Apple Store charged ‘exorbitant’ 30% commission charges for in-app purchases stating that Apple was transitioning into a monopoly and imposing its strict rules on developers. Since Epic Games had already broken the App store’s regulations and policy by introducing its own payment portal, it did not have an upper hand. The court, therefore, ruled that although Apple enjoyed a considerable market share of 55%, it did not imply that Apple was turning into a monopoly. It also remarked in Apple’s favour that ‘success is not illegal’. Following this ruling, the court eased some of Apple’s strict regulations on developers which would increase competition, transparency, consumer choice and availability of information. Such instances exemplify that considerable market power comes with its own set of challenges and regulations.


Monopolies deprive economies of developing and growing, as there is a lack of incentive and competitors to improve their products for consumers. They mostly exist for the motive of making profits while giving their consumers no room for substitutes. Governments might keep a close eye on such companies but the benefits of a capitalist economy still make way to seep into their pockets, all the while making the rich richer and the poor poorer!



References:

  1. https://www.thebalance.com/monopoly-4-reasons-it-s-bad-and-its-history-3305945

  2. https://en.wikipedia.org/wiki/1973_oil_crisis#:~:text=The+1973+oil+crisis+or,Arabia+proclaimed+an+oil+embargo.

  3. https://www.thebalance.com/what-is-cost-push-inflation-3306096

  4. https://www.parlia.com/a/monopolies-reduce-innovation

  5. https://www.investopedia.com/ask/answers/08/microsoft-antitrust.asp

  6. https://indianexpress.com/article/explained/explained-heres-how-to-read-the-apple-vs-epic-games-ruling-7504234/

  7. https://rb.gy/hsijfr

Written by Mabad Ali (mabadali33@gmail.com)

Edited by Mehak Vohra