Monopoly Definition Discourse 2: New & Revised

Many of you remember my exposition on the definition of a "monopoly." Having gone through a more serious reflection on the topic, I am posting a new & revised version of the original article. Enjoy!

The word “monopoly” seems to be thrown around more often these days than the hand grenades of Taliban insurgents in Afghanistan. It’s enough to walk into a city library to hear talk of the rising Google monopoly, of the abuses of the Wal-Mart workers, and of market takeover by Verizon, T-Mobile, and Home Depot. In the midst of the debate, however, one very quickly looses a sense of direction and balance, especially when it comes to such far-reaching economic subjects as monopoly and market control.

This article is intended to clear up any confusion as to what truly constitutes a “monopoly.” When I first introduced the question to a fellow scholarly enthusiast, , the responses ranged from "a business that can do anything it wants to" to “a business that's the best in whatevever it is that they do."

Public perceptions of monopoly power aside, let us examine the varying notions of the term “monopoly,” in both economic and popular (public) perspectives.

Modern as well as classic economists will not disagree that “true” monopolies (under strict economic interpreation) are harmful to the consumers, the economy, and the welfare of the state as a whole. If we opt to use a definition introduced by Mike Moffatt and define “monopoly” as an economic context in which “a certain firm is the only one that can produce a certain good,” naturally, this definition will produce a certain sense of aversion and animosity. After all, if only one firm is able to produce a given product, wouldn’t this mean that it can charge arbitrary prices and therefore be of detriment to the consumers and the public at large?

Other existing definitions have little degree of variance from Moffatt’s definition. The FreeAdvice Business Law Dictionary, for example, defines “monopoly power” as “the ability of a business to control a price within its relevant product market or its geographic market.” With this pretext in mind, and for the purposes of extended objectivity, let us then define monopoly as a single seller in a given field.

Even with a seemingly-“evil” definition in place, let us consider that the definition does not take into account several important variables:

(1) How the monopoly came into existence;

(2) The extent of powers and advantages that it has over its competitors; and

(3) The venue for obtaining the advantages mentioned in point #2.

At first glance, number two seems to be redundant. After all, how we can question the “extent of powers and advantages” that a firm may have over its competitors if there is only one company that can sell a given product? Wouldn’t the firm have absolute control in the marketplace and therefore exclude all of its competitors? In a few cases, this is true, though if we’re to talk about monopolies in a pure laissez-faire society (a fancy term for an economic state where there is little government intervention in the economy), we see that all three questions must be answered to determine whether (1) a firm with monopoly power can even be formed and (2) if it can, are its apparently-inherent desires to hurt the consumers limited by some other entity than the government?

In order to answer the questions before us then, we need to shift into a discussion of monopoly power in the context of a social and public perspective.

Many would say that Rockefeller's Standard Oil company was a monopoly. It did, after all, refine 90% of America's oil by 1899. Now, by a strict economic interpretation, Rockefeller did not actually have monopoly power, since he only controled 90% percent of the refining process, implying that he was not the sole seller in a given field, just the most powerful one. As argued by Dominick T. Armentano, however, modern economists have come to accept at least 70% control of a given market as constituting monopoly power. Under this adjusted economic definition then, Rockefeller did have a monoply (90% is more than 70%). To continue with our list, Microsoft Corporation's operating system (Windows) is said to run on 95% of the modern computer systems--as with Rockefeller, Microsoft is considered a monopoly in the modern economic and largely public context. At this point then, it seems that a business that controls at least 70% of the given market (computers, cereals, cars, etc.) can be termed as having a “monopoly power.”

Does this mean then, that the strict economic definition of a “monopoly” is obselete? Absolutely not. In fact, in a small town of 3000 people, the single pharmacist can be classified as holding a monopoly under both of our current definitions (being a single seller, he controls 100% of the pharmacy market, which is greater than 70%). In perhaps a more practical case, consider the United States Postal System, which has exclusive rights to sell first and third class mail without any threat of private competition. In this case, exclusive rights implying that it is given the power to hold a monopoly by the government (in an alleged effort to provide a necessary and valuable service to the public). Though the public would seldom call the USPS a monopoly, it does fit the definition of one under both of the definitions that we have so far introduced. To further corroborate our discussion, consider Amtrak, the federally-owned railroad company that has never made a profit in its 32 year old history. As with the USPS, it is an official monopoly decreed by the United States Federal Government.

Just to recapitulate: We’ve introduced two definitions of a monopoly:

(1) A business that controls at least 70% of its relevant market and

(2) A single seller in its market field

We’ve also concluded that by popular notions, many people often use the first definition when defining a monopoly (though, in many cases, this classificaiton process can be as rudimentary as deciding that a company is a monopoly because it has the most amount of advertisements and it seems as if everyone always goes to shop there.)

At this point in time then, let us shift into an objective evaluation of determining whether the "monopoly" is "evil," or, as Nathaniel Branden, author of Question of Monopolies, put it, whether it has "exclusive control of a given field of production which is closed to and exempt from competition, so that those controlling the field are able to set arbitrary production policies and charge arbitrary pries, independent of the market, immune from the law of supply and demand." Theodore Roosevelt took a similar approach when he distinguished between "good trusts", or, the ones that helped the people, and "bad" trusts, the one that exploited the public (The Northern Securities Company was one of such trusts. It controlled Northern Pacific Railway, Great Northern Railway, Chicago, Burlington and Quincy Railroad and was subsequently dissolved by a government decree).

Without getting into the economic jargon, let us look to Mr. Lawrence W. Reed, a scholar at the Mackinac Center for Public Policy. According to Reed, "When governments, by one method and to one degree or another, limit competition by means described above, the result is a coercive monopoly for producers who benefit from the limitation of competition." In contrast, the "efficiency" monopoly is one that gets its "high market share not because of any government grant of exclusive privilege, subsidy, special tax treatment, or the like, but because it simply does the best job."
What this means, according to laissez faire scholars like Lawrence Reed, Nathaniel Branden, and Dominic Armentano, a “coercive” or the “evil” monopoly is one that has been authorized to exist as a monopoly by the government OR one that exists because of some sort of government intervention in the market (setting tariffs, limiting mergers, establishing price controls, and other restrictive measures). In contrast, the “good” monopolies are ones that emerged as the business leaders in their relevant markets because of their ingenuity and ability to simply “be the best.” Some would say that under the strict economic interpretation, pure monopolies can’t arise (even Rockefeller wasn’t a monopolist under the definition.) In rebutting the 70% definition, many (including Armentano and a Nobel Prize winner Milton Friedman) argue that even if a firm is able to reach this position, it isn’t inherently a bad thing (it benefits the consumers, in fact) and it certainly does not have the power to abuse the customers. We’ll examine the validity of these arguments later on.

Using our coercive v. efficiency standard, we can thus conclude that USPS is a coercive monopoly--it has exclusive rights to sell and deliver 1st and 3rd class mail not because of its ability to do so at the lowest price, but because the United States government has granted exclusive privileges to the corporation. Though I will introduce a more coherent analysis of the USPS later on in the book, because of the government benefits, USPS lacks accountability, is victim to arbitrary price shifts, and is a burden on the U.S. revenue. An efficient monopoly, in contrast, is one that has reached its dominant position on the market through its efficiency and ability to lower the means of production. Walmart is one such monopoly, it has achieved its market position because of its ability to provide the lowest prices, driving the competitors out of business.