Companies have several practices they do to become more profitable. As you know, profitability in business is crucial to stand tall over competitors. But, unfortunately, many companies employ unethical practices in free markets such as monopolization to gain better standing.
A monopoly happens when a company gains a dominant position in an industry or a sector. It’s basically when a single company has no competition in their industry. When it occurs, it causes an imbalance in commerce, leaving consumers to suffer its negative effect.
For that reason, nations with free markets heavily regulate companies to ensure monopolies aren’t established. It hurts consumers of all classes and makes for an unfair, unequal, and inefficient market. Learn more about how troublesome it can be in this blog.
How a monopoly is created
There are multiple ways a company can monopolize its industry. It’s usually the larger companies that do them since they already have the market power to dominate. These companies monopolize their industries because of through various methods.
It’s either they’re a single seller, which means they’re the only seller available, making it a pure monopoly, or a price maker, which means they’re able to determine the price of their products without any competitor undercutting them. A dominant company can also kill its competition and monopolize a sector by purchasing large volumes of raw materials it needs at a volume discount, called economies of scale.
Besides commerce practices that were just mentioned and others such as mergers and acquisitions, the government can also assist in monopolization. While they normally prevent monopolies, they encourage and even create them in certain situations where they deem it necessary to protect consumers and innovative companies. In the U.S., they have antitrust laws that prevent monopolization where they can sue companies for attempting to create it.
You can find more information about these laws and what is an antitrust lawsuit through government and consumer group websites.
Here are some ways governments can create monopolies:
- Granting exclusive rights
The easiest way for a government to create a monopoly is by granting exclusive rights to provide goods and services.
Nationalization is a process in which the government itself takes control over a business or industry.
- Intellectual property laws
Because governments have laws to protect intellectual property, businesses with patents and copyrights are given a monopoly over things like ideas, concepts, designs, etc.
Reasons for monopolization
For businesses, they monopolize their industry for profit. Being a monopoly means a single company control things such as pricing, the supply of raw materials, the number of products sold in the market, and your competitors. They’ll enjoy the benefit of being in an exclusive market with no competition.
However, the fallback of a monopoly will be passed on to the consumers. They’ll be forced to pay unjustifiably high prices for products they need to buy. Besides the consumers, it’s also a problem for entrepreneurs who wants to start their own business.
Any new entrepreneur who attempts to start a business will have a tough time breaking into a monopolized market. When they do, their businesses are highly likely to falter in the face of the monopoly. That’s why governments block mergers or an acquisition of another or multiple companies to maintain healthy market competition.
Monopolies are most problematic for consumers whenever private enterprises create them. This is because such monopolies are designed to dominate and eliminate competition to maximize profits. Therefore, laws will be crucial in regulating monopolization attempts and how governments can enforce and protect consumer interest.
Dinah Storm used to work in the corporate world as a marketing affiliate. She quit her job to pursue her passion for writing, but to this day, Dinah is committed to educating consumers about the different marketing scams and how to avoid them.