Monopoly … it’s the game that we played as kids (and some of us as adults), trying to buy up land and build as many houses and hotels as we could. Monopoly is also the goal of many corporations, although the government often institutes laws which keep monopoly power to a minimum. So, what is a monopoly and what does a monopoly mean to you?
A monopoly exists when a single company serves an entire market and there is no company which can provide a product or service which can substitute for this. For example, a judge found that Microsoft held a monopoly in the Intel-compatible PC operating system market since there was no competition or substitute for the Microsoft operating system. When a company has monopoly power, a company can charge whatever price it wants for the product (in theory). A simpler example of a monopoly is the lone gas station in a small town that is fifty miles from the nearest competition. In this case, the gas station can often charge a premium for its gas since it has no competition from other gas stations.
Just because a company that has a monopoly can charge whatever price it wants for its product doesn’t mean that it will charge the highest price for this product. Consumers will have to determine whether or not they are willing to pay the price that is offered by the company with the monopoly. For example, in the gas station example, a driver may decide to drive to the next town to purchase gas if the price is too high (unless, of course, the car does not have enough gas to make it to the next gas station). In the end, a company with monopoly will want to determine the price which will allow for the highest profits possible.
Like the game of Monopoly, companies can gain monopoly power through a combination of luck and skill. Technology (economies of scale), acquisitions (and economies of scope), product bundling, and patents or other legal barriers may help a company to gain monopoly power. In Microsoft’s case, its patents and technology allowed it to gain monopoly power in the software market where it was trying to bundle its IE and Windows programs together, keeping competitors out of both markets. In order to reduce its power, Microsoft was required to share its application programming interfaces with other companies and allow auditors to make sure that it was indeed sharing this information.
It is rare for companies today to find themselves in Microsoft’s situation. In many industries, companies can find a way to compete on a variety of fronts, thus making the monopoly often just a topic covered in economics classes instead of a real business concept. Although it is rarely encountered in the business world, it is important to understand what monopolies are and how they can come about.