MONOPOLY

Monopoly is a market or industry controlled entirely by one seller or firm that produces a product for which no close substitutes exist. The monopolist sets the price of its product and generally produces just enough to ensure plump profits. Although prices are normally higher than in a competitive market, monopolies are still disciplined by market forces. It does not benefit the monopolist to raise the price so high that no one can purchase it or to produce a product that is not in demand. A pure monopolist will examine the different prices and quantities it can sell in terms of the corresponding production costs incurred. Whatever price-quantity combination yields the highest profit will be chosen.

Very few cases in the American economy exist where a single seller enjoys full control of the supply of any one economic product. Few monopolies start off as such unless they own a copyright or patent. A business can become a monopoly by buying up the competition or driving competitors out of business. In addition, a monopoly may develop if production of a product requires specific skills.

The most common and effective barrier preventing monopolies is legal restriction. Nineteenth-century Americans considered competition essential for the democratic way of life. They looked to the legal system to block private accumulation of power or "trusts" which they perceived could threaten democratic government. In 1890 Congress passed the Sherman Anti-trust Act "to protect trade and commerce against unlawful restraint and monopoly." To strengthen and complement the 1890 act, Congress passed the Clayton Antitrust Act in 1914 and the Robinson-Patman Act in 1936. The Federal Trade Commission, established in 1914, regulates unfair methods of competition in interstate commerce.

Occasionally a privately owned service is deemed so essential by the U.S. government that it will be shielded from antitrust laws or it will be regulated by the government. These are called natural monopolies. In the United States these primarily include public utilities, such as gas, electricity, natural gas, and water. By 1998 competition was introduced into the electricity and natural gas market through deregulation.